Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
Japan getting it done
While attention remains pinned on China, Japan has been the quiet achiever in Asia with the Nikkei remaining at 15-year highs. The recent gains in the greenback have been the pinnacle of the rally, sending USD/JPY to 2002 highs. Data in Japan has also been showing signs of bottoming and clearly the weaker yen is starting to work for the economy.
Today’s releases included CPI, jobs, industrial production and household spending. Headline CPI was in line with estimates but CPI ex-fresh food and energy was ahead of expectations. The unemployment rate also fell but household spending remains a worry after contracting 1.3%, although this was a vast improvement from the previous month’s -10.6% reading.
USD/JPY hit ¥124.46 this week and, while it looks a bit toppish in the near term, I feel buying pullbacks into the ¥122.00 region would be a good opportunity. This region is where the breakout accelerated and now presents some support.
China weaker but stabilises
The China sell-off seems to have come to a choppy end in today’s session and it is clear why some fund managers remain sceptical about exposure to emerging markets like China. Fund flows into China have been accelerating recently as investors looked to get a piece of the rally in equities.
A move by brokers to tighten margin financing caused some sharp falls in yesterday’s trade and prompted all sorts of correction calls. However, the reality is that equities in China have experienced unprecedented gains this year already and profit taking tends to exaggerate any falls.
It’ll be interesting to see if the stability holds in the near term and, given this pullback, is exactly what some investors have been waiting for. I wouldn’t’ be surprised if all of yesterday’s losses are erased in just a couple of sessions.
Banks in control
The ASX 200 got off to a flyer after recent underperformance and I suspect it was due to the month-end buying that was taking place. May has been a lacklustre month and already today we’ve seen over $5 billion in volume suggesting we’ll be a little above the year’s average today.
Banks are being bought up in a big way with the big four putting on 2% and above. I wouldn’t be surprised to see these moves extend into June as we head towards the end of the financial year and investors renew their appetite for yield. Expectations of a weaker AUD are also helping to underpin.
AUD/USD is still reeling from yesterday’s capex numbers and it looks like we are firmly on the way to April lows in the $0.7550 region. Traders could look to sell any moves above the $0.7700 handle.
While a 34% drop in mining investment was disappointing, perhaps the 10.4% drop in non-mining investment was even more alarming given that’s the area of the economy the RBA is looking to resuscitate. Some are now calling for a rate cut but I feel it’s too soon to make such calls.
Firmer open for Europe
Ahead of European trade we are calling markets modestly firmer. While commentary from Greek officials remains optimistic, with officials suggesting a deal will be reached in coming days, the IMF’s Christine Lagarde was reported as saying a deal is very unlikely in coming days and a Greek exit from the euro is a possibility.
Surprisingly, though, EUR/USD had a bit of a relief rally and edged towards $1.1000. Given the fundamentals haven’t really changed, I believe this will be viewed as a great selling opportunity. I suspect there will be plenty of headlines about Greece driving volatility in coming weeks as €1.6 billion is due over four tranches.