US markets may have overlooked the negative price in Asia on Friday, but this has been no source of inspiration for Asian traders today, who continue to take risk off the table.
In a week where little major data is due in global markets, the Nikkei will remain the index of interest, with the volatility continuing in earnest today. Head of the BoJ Haruhoke Kuroda has tried to appease sentiment over the weekend by saying the economy could withstand an increase in yields (even as much as 3%), as long as it is backed by economic growth. He has also called on the banks to increase lending and promote growth. Interestingly, the Japanese bonds have stabilised, with the ten-year falling modestly to 82 basis points and USD/JPY trading in a range of 101.84 to 100.80, although it is currently at the lower level of this region.
Keep an eye on 100.19 (the top of the monthly ichimoku cloud), which USD/JPY hasn’t managed to close above since 2007. A close above this level would be taken positively.
The Nikkei fell to a low of 10,413, just above Friday’s low of 13,981, although there have been bouts of good buying activity through the market. However, this is an index for the very brave, and with such amazing volatility, stops have to widen or traders run the risk of being stopped out rather quickly. BoJ statistics suggest that a 1% (100 basis-points) rate rise would lead to mark-to-market losses of 10% of tier-one capital for major banks and 20% for regional banks. This is manageable, because banks can pass this charge onto customers. However, a major move higher will severely damage nominal GDP due to the drop in credit, and nominal GDP is essential for ‘Abenomics’ to work. The bank has to push up inflation and inflation expectations if it is to create the necessary levels of nominal GDP to avoid a major disaster. However, at the same time it needs to bring the fiscal deficit down. And while the much-anticipated increase in consumption tax to 8% next year will help here, it certainly won’t do anything to spur credit growth, while higher bonds yields will be passed onto the consumer by banks to offset the impact seen to tier one capital. Clearly this is a part of the world we need to keep our eyes on, as the BoJ and Abe government have a delicate balancing act and the numbers of traders who are suggesting this will end badly are increasing by the day.
AUD/USD has fallen modestly to a low of 0.9615, while AUD/JPY continues to pull away from the bottom of the ichimoku cloud we highlighted last week. Positioning in AUD/USD is becoming more one-sided, with net shorts held by futures traders increasing to -32,409 contracts. Not bad considering traders were net long +103,000 at the beginning of the year.
News out today that both Crown and ANZ bank are cutting jobs won’t aid sentiment, and to be fair it’s hard to remember the last bit of good news we had on the Aussie economy. Thursday’s Q1 CAPEX figures are the week’s highlight, and the key will be on the revised read on 2013 to 2014 ‘intensions’, with many feeling that the previous forecast could be revised down around 3% or so to $148 billion. A number below here can’t be ruled given all we have heard of late, and this should see AUD/USD through last year’s lows of 0.9582.
The ASX 200 (down 0.5%) has seen follow-through selling, hitting a low of 4931. We’ve seen some buying of dips, however the pullback from the recent double-top of 5249 is now 5.5%, and in the last five days the financial sector has lost 7%, discretionary 6.5% and utilities 4.7%. The fact that defensives haven’t really outperformed cyclicals highlights this has been a broad-based liquidation of some stretched positions, and at least from an index perceptive support should be seen at the April 5 low of 4883.
Turning to Europe, with the FTSE closed for May bank holiday, the markets that are open for business look set for good upside. Front month S&P 500 futures are up 0.7% from the European equity market close, so of course this seems to be helping, although client business is quite mixed. Data is light, while company reports are limited as well, so it is natural to feel this is going to be a session that traders will probably look to catch up with clients or do some much-needed housekeeping. In fact, this whole week looks quite quiet and that is certainly needed after last week and before next week’s raft of key event risk culminating in the anticipated US payrolls report.