Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
Asia has not managed to mirror the gains seen in European and US trade with most key markets in the region struggling. Of course, the exception is Japan where investors continue to react to the latest developments and this saw the Nikkei open at a fresh seven year high. Prime Minister Shinzo Abe called a snap election and delayed the sales tax hike by 18 months. The election is likely to be held as early as December 14 and it is being seen as a referendum on Abenomics. Abe will dissolve the parliament’s lower house on November 21 and risks losing his two thirds majority control. Should he lose this majority then it’ll be harder for him to pass legislation without upper house approval. Analysts feel this election is a ploy by Abe to breathe fresh life into his agenda and potentially gain more ground as the opposition is currently in a shambles. Additionally, a victory would allow him to put aggressive reformers in key posts. While this all seems straight forward, I’m sure this will present challenges along the way and Abe vowed to step down if Abenomics doesn’t work. As a result it is clearly ‘make or break time’ for Japan and given the country just entered a technical recession, we are likely to see a ‘whatever it takes campaign’. The other issue now will be how the BoJ fits into all this. There is no way Abe can achieve his goals without the help of the BoJ and the current challenges are likely to push the government and central bank even closer to each other. With the BoJ and government working together, I feel dips in the Nikkei and USD/JPY will continue to be met by buyers and we’re in for a volatile month ahead. While the BoJ kept policy unchanged today, USD/JPY remained bid along with the Nikkei.
AUD and ASX 200 struggle
The ASX 200 continues to drift despite a firmer open with iron ore miners dragging the index lower. With iron ore at a five year low and iron ore futures retreating sharply through Asian trade, the likes of FMG, ARI and AGO are significantly weaker. Key support levels have been breached and I would not suggest trying to pick the bottom in some of these stocks. Gold stocks are a bright spot today but I suspect this move could also be short lived as commodities remain choppy. There is also growing talk of potential easing next year as the domestic economy continues to struggle. Key risks for the economy include a deteriorating Chinese property market, struggling key commodity prices and a high AUD. Additionally, the pickup in non-mining investment perhaps hasn’t been as prompt as the RBA had hoped. Glenn Stevens last night said the economy warrants low rates for some time but there is a sense that a housing slowdown could force the RBA’s hand, given an appreciation in property prices has been the main driver of consumer confidence in an environment where wages are stagnant. Perhaps this explains the renewed weakness in the local currency as AUD/USD has now slipped back below $0.8700.
FOMC minutes in focus
Ahead of the European open, we are calling the major bourses relatively flat. The surprisingly strong ZEW economic sentiment readings for Germany and Europe yesterday drove gains in European equities. This also pushed EUR/USD higher but sellers are likely to see this as an opportunity for shorts. Data is limited today but ECB member Praet will speak on sustainable growth. In the UK, focus will be on the BoE minutes but not a lot is expected from this release. The US session brings building permits, housing starts, crude oil inventories and the FOMC meeting minutes. The statement from the October meeting was moderately hawkish and the minutes will elaborate inflation expectations, impact of energy prices, forward guidance language and diminishing underutilisation of labour resources.