Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
Asia is mixed despite some fairly weak leads from overnight trade. An escalating Iraq situation and disappointing US economic data were the main factors driving risk assets weaker. The BoJ decision has perhaps been the highlight of the session so far despite not really bringing anything new to the plate. The BoJ remained on hold as expected but revised its forecasts on overseas economies higher. Essentially some feel this implies we are unlikely to see further BoJ action anytime soon. Regardless, the move in the yen was quite limited with USD/JPY managing to come off its lows to trade at 101.87. However this is nothing major and in fact the Nikkei has continued to trade to the downside. The Hang Seng and Shanghai Composite have been an exception with investors looking ahead to the data releases due out at 15.30 AEST. There could also be some upside from data released yesterday showing Chinese banks extended more new loans in May than the market expected. China releases its industrial production, fixed asset investment and retail sales at 15.30 AEST. This could have some implications on risk through Asian trade, particularly given the recent improvement we’ve been seeing in China data. There is a good chance there could be some upside risk.
Europe in for a weaker open
Looking ahead to the European session, the major bourses are facing a weaker open as the negative sentiment continue to impact trade. There is a bit of data on the calendar including employment readings for France and the region. We also have a revised German CPI reading along with trade balance for the region.
Cable has continued to extend its gains in Asian trade and is edging ever closer to May highs just shy of 1.70. Sterling got a kicker from comments by BoE Governor Mark Carney, suggesting rates could be lifted from a record low level sooner than the market expects. Mr Carney has been one of the more dovish members within the central banks ranks, so when traders see comments like ‘the start of BoE rate increases is getting nearer’ and an ‘acute need for vigilance on housing market’ they react. Carney however tried to balance this out by saying any rate rises will be gradual and limited. This wasn’t enough to hold the bulls back as the pair has continued to rally in Asia. While the UK economic calendar is fairly quiet today, there is another round of US economic data. The readings include PPI, consumer sentiment and inflation expectations. Should we see another round of disappointing US economic data, there is a good chance the greenback will lose further ground to the pound and underpin the pair further.
Resources mixed with iron ore weighing
The ASX 200 slipped below 5400 today and just recovered into the close after having struggled amid another wave of selling in the pure iron ore plays. With iron ore dropping to 91.50 and Dalian futures pointing towards another drop, there is just nothing encouraging investors to buy these miners. FMG, AGO and MGX are all suffering sharp declines. Gold miners have managed to hold on to their gains helped by the gold price recovery. NCM, RRL and MML have all rallied today. There are also bright spots in the energy space which have been ignited by good gains for oil and natural gas. Iraq is OPECs second largest oil producer, so concerns around civil war should keep crude supported. Some traders will be playing the Brent/WTI spread, by being long brent and shorting WTI and netting off their exposure. This could be a good strategy to play the energy complex. Another issue which deserves some attention is the global economy simply isn’t ready for an energy led inflation spike and this could hold equities back heading into next week.