Chris Weston, Chief Market Strategist at IG Markets
Markets have been focused on three major issues today: the PBoC widening the daily trading band to 2%, the record outflow of US treasuries from the Fed’s custody and the potential economic impact if Vladimir Putin formally authorises the inclusion of Crimea into Russia.
Logic would suggest the last two issues are related, and news flow has speculated that the $104.5 billion fall in foreign holdings of US treasuries held with the Fed is actually Russia transferring its position to a closer, third party custodian in case of action from the US authorities. Naturally we don’t actually know who transferred their holdings, but if it was Russia then it makes sense to take this proactive action.
It’s important to understand that this transfer was not an outright sale as such, and despite the US treasury market having extremely deep liquidity pools, a sale of $105 billion would scare the life out of the buyers, and thus you’d expect to see a massive move to the upside.
The Crimea vote went as the market had expected, which explains why we have seen limited moves in gold, the JPY or US futures. However that could still change and we should hear Vladimir Putin at some stage formally accepting Crimea into the Russian Federations arms, although we have heard from some political commentators suggesting that Russia could appease the G7 foreign ministers (who meet today at 19:30 AEDT in Brussels), by not formally accepting Crimea in return for limited (if any) sanctions. This is clearly the lesser possibility, although if it does play out we could see relief in a number of asset classes.
Better days in China’s markets
In China all eyes have been on the daily ‘fix’ to see how the PBoC would respond given the weekend announcement of the widening of the trading band to 2%.
The fact that the Chinese central bank lowered the ‘fix’ by 25 basis points was fairly positive and it was good to see limited volatility in CNH (offshore Chinese Rinminbi), although the pair is above 6.1500 and the closer we get to 6.2000 the more concern we may see if other asset classes. Interestingly, we have seen good flows into Chinese equities, with the CSI 300 futures pushing high by 1%, while Shanghai copper is modestly higher and iron ore futures are flat.
In Japan the market is also fairly flat, although if you take Softbank out of the mix you’d have market 50 points lower. Softbank has a 37% stake in Alibaba, which announced it will IPO in the US this year, so we may also see a further pop in Yahoo as well in US trade tonight, who also have a big stake in the Chinese internet giant. USD/JPY was smashed last week and price action looks fairly bearish. On the weekly chart, the MACD is below the signal line and if you had followed this indicator over the years you have done rather nicely.
Since 2009 if you had sold USD/JPY when the MACD broke below the signal line (on the weekly chart) and reversed the position to hold longs when the MACD was above the signal line, you would have transacted 12 trades from the start of 2009. Importantly, not only would you have achieved a 75% success rate, but the winning trades have been five times as profitable. So with the MACD below the signal line this should help with directional bias from a technical view point.
ASX 200 targeting 5220?
In Australia the ASX 200 has lost a bit of ground, although the fact that the market is fairly flat despite geopolitical concerns is positive. The only sector to really show any heightened volatility is the consumer discretionary space, which has lost 1.2%. From a technical standpoint, the market continues to pull away from the March 3 low and neckline of the double top at 5340 and would be targeting 5220 based off this completed pattern. However given the MACD is still above zero, this could suggest moves here will present themselves as a buying opportunity on current news flow.
The AUD/USD is basically tracking sideway and I’ll be looking at fresh shorting opportunities on moves to 0.9133, however in the next couple of days while the trend is flat I’d play the 0.9084 to 0.8919 range.
European markets will open on a negative note, with all the attention aimed at the EU foreign ministers meeting in Brussels and also what Vladimir Putin plans to do with regards to accepting Crimea. At an index level the DAX looks supported on moves to the June 2012 uptrend at 8870 and is underperforming on the pullback we’ve seen from the February high, falling 6.8%, while the FTSE has fallen 4.9% and the MIB a more modest 2.5%. In terms of data we get US industrial production and New York manufacturing.