Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
Asia drifts on Greece uncertainty
A sense of caution prevails in Asia with some investors choosing to hedge as we head into the eye of the storm on the Greece crisis. While moves in equities have been concerning, currency markets have managed to remain fairly steady. In fact, we haven’t really seen any noteworthy moves in fx majors this week. This could partly be a product of uncertainty ahead of the FOMC meeting which is yet to take place and of course varying headlines on Greece. The price action in Europe continued to deteriorate as Greece concerns kept investors in defensive mode. Perhaps the only surprise at the moment is the fact the euro remains fairly resilient despite the chaos in the bond markets. EUR/USD is still holding its ground well above $1.1200 with the single currency even managing to gain some ground against the greenback. ECB President Mario Draghi testified in front of parliament and said the ECB has all the tools needed to manage contagion risk associated with Greece. Perhaps this was one of the key reasons why the euro managed to hold its ground. Additionally, European banks now have limited exposure to Greece and global fund managers looking to capitalise on QE to accumulate European equities are helping to keep the single currency buoyant. Regardless, the medium term trend for EUR/USD remains downward and I feel strength will continue to present selling opportunities.
Banks outperform
Asian equities have mostly been drifting in today’s trade with no fresh developments to give any direction. The ASX 200 has bucked the trend and is modestly firmer with banks underpinning the performance today. From now on I would be sceptical about being caught out on short domestic equities; as investors close out books there could easily be some abnormal moves. Investors were also looking for any fresh insight from the RBA today, particularly after a couple of positive signs from jobs and GDP. The minutes from the June meeting didn’t reveal much as the RBA simply reinforced the benefits of a weaker currency for the economy. We already know an easing bias is in place and the real concern at the moment comes from the drop off in capital expenditure by companies. Once we see stability on that front and a pick-up in the contribution from the east coast, then this will be pivotal to a broader economic recovery. AUD/USD barely flinched on the minutes and simply remains in a holding pattern like most major currency pairs. Perhaps the next big move in fx will come from the FOMC meeting. The risk is of a more dovish than expected Fed; that could cause some near term greenback weakness.
Firmer open for Europe
Ahead of European calls we are calling the major European bourses modestly firmer with a bit of a recovery from recent weakness. Once again headline risk around Greece will be the main focus with German reports suggesting Greece will be asked to impose capital controls this weekend if no agreement is reached. Many investors will be looking at worst case scenarios like a default, imposition of capital controls and/or a withdrawal of emergency liquidity facilities. This is enough to frighten anyone and perhaps today’s euro working group on Greece will shed further insight. On the calendar we have the ZEW economic sentiment readings and employment change to look out for. In the UK we have CPI and PPI with the former capable of causing some sterling volatility.