ASX at the close

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With Japan offline for the Vernal Equinox day, it was down to the ASX 200, Hang Seng and Shanghai Composite to bring the focus back into the equity space.

Cyprus remains the main macro concern, and the twists and turns in this saga continue to subtract sentiment from the EUR, and feed safe-haven asset appreciation. EUR/USD did find some love after re-assuring words from the ECB that it will continue to provide funds to Cypriot banks via its Emergency Liquidity Assistance programme. This is positive given the banks will be insolvent if they don’t receive this liquidity from the ECB. What’s more, there has been talk that the banks may not open their doors until next week, despite current expectations indicating Thursday.

As mentioned yesterday, the whole process seemed messy and showed a total lack of cohesion from the different officials. This is not the first time we have seen a vote fail and new negotiations take place in Europe. It seems logical that a deal requiring depositor pain will have to be reached, given this is essential in gaining the support of both the Germans and the IMF. Russia may provide a bridging loan, and discussions are (from all accounts) still under way, but will this ultimately fix the issue given it is simply layering debt on debt? Cyprus was provided a €2.5 billion loan in 2011, and any more debt may see the IMF stay clear of further negotiations given the whole objective is to achieve debt sustainability.

The fact is the EUR has found strength not just because of the implementation of the OMT (the ECB’s outright monetary transactions) programme or because of Europe’s balance of payments, primary surplus or Fed’s ultra-easy money programme. Of course these have helped, but strength has also been aided by EU leaders showing a huge amount of political will to keep the seventeen-nation union alive at all costs. A default of Cyprus simply cannot be ruled out now, and despite the country being a tiny island worth 0.5% of Europe’s GDP, if it is allowed to leave, it could have huge psychological ramifications.

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The EUR is looking predicably heavy as a result of the news flow. Against the JPY it has breached and closed within the daily Ichimoku cloud, and is on the upper limits of it against GBP. EUR/AUD looks heavy and is in a strong downtrend, having lost 5.8% since February. Given RBA deputy Governor Philip Lowe’s comments yesterday that he welcomes AUD strength, the Aussie seems a logical fundamental choice here. EUR/USD on the other hand managed to hold the 200-day moving average at 1.2876, but momentum and trend indicators suggest selling any bounces here.

In Asia, it’s the ASX 200 that is the laggard (closing down 0.4%), certainly not helped by Goldman Sachs who put out a note painting a weak outlook for the iron ore price, and subsequently cutting Rio Tinto to a conviction sell and BHP to neutral. The index fell to a low of 4937, but has seen a decent reversal with banks leading the charge, as China rallied hard into the afternoon.

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The fact that Shanghai is up 2.1% is providing some confidence and is a welcome side-story from Cyprus, although there doesn’t seem to be one main reason behind the strength. There has been strong buying in cement and banking names, with some attributing the move to talk the CBRC (China Banking Regulatory Commission) may ease loan-to deposit ratio enforcement on smaller banks. It was also positive to see a US bank putting a 50,000 price target on the Hang Seng by 2015- well over 100% upside from current levels. On the other hand, the China finance Ministry auctioned ten-year bonds at a yield of 3.52% against expectations of 3.58%. Whatever the reason, the index has had a nice break of the February downtrend and we will wait to see if it can close above the trend.

Our opening calls for Europe has seen a slight bias to be long, as the China market and the different Asian indices have pushed up from the close of the S&P cash session. Whether this has provided the bears a better level to sell into is yet to be seen, but clearly when you have the UK budget, BoE minutes, UK jobless claims and of course the FOMC meeting, one gets the sense that volatility is on the cards. It seems quite a few traders have been scrambling already for put protection, and while the VIX had a nice spike higher on the day, CBOE also recorded 1,392,621 VIX options contracts changing hands – a new record.

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The UK budget could actually end up being the highlight of the night given the potential changes to the BoE’s remit, which of course could have significant implications of future policy. The FOMC on the other hand is not expected to throw up any surprises, which in theory concerns us as the market is simply not prepared for any major left-field language changes. The main issue for us is the Fed’s view on the unemployment rate, with the board having a consensus target of just over 7.7% for the full-year. If the board acknowledges the strength in the labour market and cuts this target, this invariably would cause strong inflows into the USD. While we don’t rule out a change here, we feel the Fed will want further evidence before cutting its forecasts to say 7%.

All-in-all the prospect of further headline-driven price action from Cyprus, the UK budget and FOMC meeting and subsequent press conference suggests a night of volatility ahead of us.