After a fairly lacklustre morning session, volatility has picked up in afternoon trade with Japan once again at the forefront. The mood in Asia was relatively subdued as investors awaited comments by Japan Prime Minister Shinzo Abe. This saw equities fall across the region with the ASX 200 leading the decline earlier. As soon as comments from Abe started hitting the wires we saw USD/JPY start to move after having been range-bound between 100 and 100.4 for most of the morning session. USD/JPY has since printed a high of 100.46 before dropping back below 100 to a low of 99.39. The Nikkei was also dragged lower and is down over 3% at the time of writing and back below 13,000.
Heading into the Japanese upper house elections, we are likely to see rhetoric ramp up from Abe and BoJ Governor Haruhiko Kuroda. They will really want to see the Nikkei trade higher and lift confidence in the country. The market will be looking to hear more about his comments urging Japan’s public pension funds to increase their investments in equities and overseas assets. The comments made by Abe today were not really a game changer and disappointed a market which seems to have been positioned for a USD/JPY and Nikkei rally. Despite today’s drop in USD/JPY and the Nikkei, it is still difficult to not take advantage of some of these pullbacks. Yesterday, USD/JPY printed a low of 98.87 and this will be the key level to watch in the near term.
AUD/USD has also seen some volatility today and dropped off after GDP data missed expectations. Quarterly GDP data showed a 0.6% rise versus 0.8% consensus. This rattled confidence a bit more and the AUD fell to a low of 0.96 against the greenback. Traders are likely to be still eyeing to sell the pair into strength and we might see it head towards last week’s lows in the near term. Whichever direction you turn, the AUD just looks like a sell at the moment. The underlying fundamentals look weak and even the RBA aired its concerns about the exchange rate ‘remaining high’ in its statement yesterday. Following today’s data, chances of a rate cut have jumped from 2% to 35%. The broader macroeconomic picture also seems to be negatively impacting the AUD.
Looking ahead to the European session we expect to see some falls of around 0.5% plus at the open as they play catch-up to the losses experienced everywhere else. EUR/USD hasn’t done much at all and remains sidelined above $1.30. We sense the single currency will remain fairly subdued until the ECB meeting and Mario Draghi’s conference. Services PMIs for Italy, Spain and Europe later today, along with retail sales, are unlikely to have as big an impact but will certainly set the scene for positioning ahead of the ECB. We are also approaching the business end of the week on the data front, with ADP non-farm employment change, US non-manufacturing PMI and the Beige Book due out later today. Tomorrow we have central bank meetings for the UK and Europe set to hit the wires. Currencies were relatively steady through US trade, and this highlights the level of uncertainty and caution being exercised by investors. The US data dump later today will see QE repricing in full force yet again. In US trade we had Fed member Esther George on the wires urging the Fed to taper off on asset purchases. Having said that, George has always been a hawk and this wouldn’t have come as a major surprise. Markets remain quite choppy as investors are still uncertain about the future of QE.
The ASX 200 has dropped over 1% today and traded as low as 4831 in the aftermath of the disappointing GDP reading. Miners had helped stem the losses in the early part of trade but this was short lived as the big iron ore names eventually lost their grip. BHP and RIO have since dropped around 1% each but FMG has bucked the trend with a 3% rise. Gold names are suffering yet another round of selling with Newcrest dropping over 5%. A sharp drop in Macmahon shares following the loss of a contract with a unit of Glencore Xstrata put the mining services companies back in focus today. MAH has dropped double digit figures with $80 million knocked off its revenue from the coming financial year. In the grand scheme of things MAH’s revenue is usually in excess of a billion dollars and as a result this figure shouldn’t be too worrying. The damage to confidence is what is a bigger factor for investors in this environment and it’s also quite interesting to note that a lot of brokers have been caught out by this. Macquarie has an outperform, Deutsche Bank a hold and BBY a strong buy on the stock. Only 15% of brokers covering the stock have a sell recommendation on it. An acceleration of the losses in the big yield plays and other defensive names has really put a dent in the market. The healthcare sector is housing some of the few bright spots in the market today with Cochlear bouncing back over 3% and ResMed up 1%.