Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
Asia is experiencing some weakness in response to cautious trade around the midterm elections and declining energy prices. Additionally, Europe has been a source of concern following reports which suggest ECB leaders are planning to challenge Mario Draghi. While there is certainly a lot of noise out there, I feel little has really changed and the key themes will remain a data dependant approach to Fed tightening expectations and what happens with the ECB and its easing measures. While oil prices have been a talking point lately, following sharp declines, they could easily snap back and just as easily spike once the current driving forces are out of the way. As a result, I don’t find this to be a huge investment threat and don’t feel this necessarily changes the themes dominating markets. After the recent run for equities in particular, investors were always going to find an excuse to take the foot off the pedal and it seems the oil price drop has been timely. US mid-terms conclude in a couple of hours and it seems the Republicans are on course to gain control of the Senate. At the same time, Republicans are likely to expand their majority in the House. This means investors are perhaps exercising some caution because of the uncertainty around how this will play out and what it will mean for the markets.
Japan cools off
The Nikkei has finally cooled off today, with equities succumbing to some profit-taking pressure after a few days of resounding gains. While we are seeing a bit of a pullback, I feel this is by no means structural related and more tactical for traders, in particular. Pullbacks are likely to be taken advantage of by investors and used as a buying opportunity. BoJ Governor Haruhiko Kuroda was on the wires again today and reinforced his readiness to act as he chases the 2% inflation goal. While this has not made much of a difference to price action in the yen or Nikkei, it certainly keeps the longer term investment case intact. The greenback is in focus as well this week, as we receive the latest readings on jobs. Later today we have ADP non-farm payrolls data, which is expected to show a print north of 200,000 yet again and will be followed up by the official payrolls print on Friday. Any indication that data is tracking well ahead of expectations is likely to be construed as hawkish. The effect of solid data will be US dollar positive and will in turn lift USD/JPY.
ASX 200 target cut
The local market struggled to hold on to a mildly positive start and even a modest rise for CBA following its trading update hasn’t been enough to lift the ASX 200. Materials and energy sectors are deep in the red as metals and energy prices struggle. Perhaps what’s actually grabbed most of the attention was Morgan Stanley downgrading its ASX 200 target from 5800 to 5350 on the back of lower growth assumptions. Morgan Stanley feels there are challenges to earnings growth and the strong yield advantage will continue to provide a floor in index levels. Focus now shifts to tomorrow’s jobs numbers and this could bring some volatility for the AUD.
Europe set to recover
Ahead of the European open, we are calling the major bourses firmer with yesterday’s sell-off seemingly overdone. Given the sell-off was sparked by reports suggesting ECB leaders are planning to challenge Mario Draghi, any indication this is not the case is likely to lead to a recovery. The fact that the European Commission downgraded growth forecasts for the region is not necessarily a negative at this point, as this means the ECB will probably have to be more aggressive to lift growth. While investors would want to see sovereign bonds being added to the asset purchase program, this remains in doubt given the decision on the OMT is still pending. As a result, any BoJ style surprises from tomorrow’s meeting are unlikely but I still feel the recent strength in EUR/USD will be used as an opportunity to sell.