Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
Equities rebound on stimulus expectations
The trading environment remains volatile and it didn’t take long for equities to erase some of the losses we saw on Friday. Chinese equities have sprung back to life while the Nikkei and ASX 200 are also enjoying some gains. With policy makers continuing to support global growth, investors continue to feel there is room to buy the dips in equities. The reality is should the global economic climate not improve, policy across the globe is likely to become even more accommodative. We have already seen the sort of impact this can have on markets after the relentless gains in US equities through the QE cycle and similar moves in Japan as well. This is the same notion that’s been driving Chinese equities and now signs of this are showing up in some European markets.
Grexit talk continues
The Greece situation is starting to escalate yet again and given the dire situation the country is in, some analysts are already speculating on a third bailout. Greece is in a tough cash position and latest reports suggest Prime Minister Alexis Tsipras has ordered local governments to deposit reserves with the central bank. The situation is very time sensitive at the moment and it seems unlikely we’ll see a solution by the key dates. The issue of a Grexit will also remain on investors’ minds and many will ponder exactly what sort of an impact this would have on the region. Given Greece has a lot more to lose than the euro area, many feel the country will end up succumbing to the eurozone’s demands despite attempting to put up a fight. Perhaps this is why the single currency is not completely crumbling on Greece fears. Apart from the EUR/USD cross, the euro has remained steady against other majors throughout the Greece noise. Weakness in EUR/USD has been more greenback specific as it’s managed to recover after struggling last week.
RBA in data dependant mode
The AUD has been one of the more volatile currencies in Asia particularly against the greenback with focus pinned on the latest round of policy hints from RBA Governor Glen Stevens and monetary policy meeting minutes from the April meeting. Stevens spoke in US trade reinforcing the central bank’s easing bias and continued to talk down the AUD. He commented that rates should be accommodative and the question of whether they should be reduced further has to be on the table. Stevens went as far as saying he’ll be surprised if the AUD doesn’t fall some more. However, what traders were really after were hints of whether we’ll see further easing in May. There is still no clarity around this and the RBA will want to see the full effect of the February cut on the economy through Q1 data. The minutes suggested the RBA wants more time/data to assess the economy and pinned inflation as one of the key data prints to look out for. Given data hasn’t been that bad off late, it’s increasingly looking like May will be a line ball call yet again. It almost seems the RBA would want to see the AUD decline without cutting rates as a currency depreciation will likely have a broader impact on the economy as opposed to merely pushing up demand through lower rates. With that in mind, AUD/USD remained fairly steady at $0.7700 through Asia. Tomorrow’s Q1 CPI reading could bring some volatility if it’s significantly different from market expectations. The tone in local equities has also been cautious today with investors not particularly sure when the next cut will come. This has kept the yield plays at bay while materials managed to eke out some gains helped by the momentum from China.
Mixed open for Europe
Europe looks like it is headed for a mixed open with the DAX eyeing mild gains and the FTSE a touch weaker. Traders will continue to track headline risk around Greece very closely and on the calendar today we have the ZEW economic sentiment readings. The market is looking for further improvement in sentiment on that front and any disappointment could be used as an excuse to sell. Data is relatively quiet in the US and earnings will remain a key theme with around 35 companies reporting.