Angus Nicholson for Chris Weston, Chief Market Strategist at IG Markets
Investors in Asia are still digesting the massive rise seen across the region on Wednesday, and have taken the lack of any major data releases today as an excuse for relatively muted trading. Investors are likely waiting till Monday for leads into how the markets are going to trade in the lead up to the Fed meeting next week. The calm seen today is likely only the eye of the storm as volatility is sure to return with a vengeance next week. With the probability of a Fed rate hike the highest it has ever been going into a meeting since the Fed began its rate cutting cycle, there is likely to be plenty of movement in the markets whatever the outcome.
Japan
Japanese markets are intimately focussed on the outcome of two major central bank meetings: The Fed’s next week and the Bank of Japan’s (BOJ) at the end of October. If the Fed fails to hike next week, the yen looks set for noticeable strengthening. However, the decline of Q2 GDP amid a slew of other weakening data appears to be resetting the calculus for the BOJ. If the BOJ does choose to expand its Quantitative and Qualitative Easing (QQE) program, the yen could well be blown out the “Kuroda Line” of ¥125 to the US dollar.
It is these divergent macro pressures that are affecting the JPY at the moment. The JPY has weakened 1.56% this week, but it has had notable bouts of strength related to weak US data. It saw a marked strengthening in the wake of the decline in US wholesale inventories data overnight, but has since renewed its short-term weakening trend.
In technical terms, there has been a noticeable break out of the USD/JPY’s longer-term downtrend on Tuesday. Given the Fed is quite unlikely to hike rates next week, this short-term break out of the JPY from its strengthening trend seems unlikely to last. The yen looks likely to strengthen into the ¥119 level next week, maybe even touching its August lows of ¥118 briefly. However, once the Fed’s decision has been digested, speculation over the outcome of the BOJ’s meeting in October should see the yen continue to weaken.
The October meeting of the BOJ will see the release of its latest economic forecasts, and the expectations are for it to lower its inflation and GDP forecasts. This would likely see the BOJ well off track from hitting its 2% inflation target around mid-2016, and a notable and growing minority of analysts believe that an expansion of easing policies must come on the back of this data.
The ASX
The ASX has largely been trading within a band between 5060 and 5120 today, but dropping away at the end to close down 0.47%. Investors seem to be loathe to commit to any major positioning as we approach the lead up to the Fed rate decision next week. For those with longer term outlooks, the possibility of renewed global volatility next week may make it a good time to enter some standing buy positions on choice stocks in expectation of further falls in price. While those with a speculative flair, may be focusing their short positions on the energy sector. If recent bouts of volatility are anything to go by, oil and energy stocks have regularly been the worst performers recently in these types of sessions.
Given the muted trading today, it probably was an apt decision for CBA to try to close up its refinancing offer today ahead of the previous deadline of Monday as renewed global volatility around the Fed meeting could hamper these efforts. The vicissitudes of CBA’s share price since it began its refinancing push, mirrors the dramatic repricing investors have taken with regards to the outlook for Australia’s economy. No doubt CBA was not expecting such a bout of global volatility, nor such a precipitous decline in its share price when it announced the offering. But investors have baulked at the $71.50 offer price for the refinancing, and one finds it difficult to argue with them.
The outlook for the banking sector is plagued with headwinds. A slower growing Australian economy, new capital requirements, restrictions on the profitable investor loan segment and increased competition in the sector. These effects will not only impact margins, but also overall revenue growth. Despite the Big Four banks all trading below their long term P/E ratios and offering an impressive yield return, especially compared to bonds, investors have been reticent to pick up the stocks. Banking stocks closed down 0.1% today.
Boral (BLD) recently hosted its US investor day. It is very bullish on the US housing market, slightly more so than most economists. Its target to reach US$2 billion in revenue in the US over the next 3-5 years (it was US$695 million in FY15) sounds quite ambitious, and is predicated on expectations for pre-existing revenues to double as well as some notable acquisitions over the next 2-2.5 years. This does leave the stock very sensitive to an undershoot on US growth, however it had a mild day on the ASX rising 0.1%.