Japan recovers ahead of Kuroda's speech

After getting off to a poor start, markets in the Asian region are off their lows in a recovery led by Japan.

The  Nikkei is now 1.3% higher and leading the way in Asia as exporters rally. Perhaps the impact US dollar strength is having on  USD/JPY has triggered some bargain hunting in Japanese equities. USD/JPY dipped below 97 early in Asia but has since recovered to trade at 97.78 ahead of BoJ Gov Kuroda’s speech. While the market would want to hear some good news after what has been a tough week for equities, there is a growing consensus that Kuroda will hold onto his cards and use them later down the track should Japan’s current problems continue. 

The  ASX 200 is down around 0.4% while markets in China continue to languish with losses of over 1%. China’s interbank rates remain a concern and this is dampening sentiment in the region. There are reports suggesting the PBOC injected 50 billion yuan to the financial system yesterday as they try to stabilise the financial system. The reports suggest this has only gone to a couple of banks and others are in negotiations to also get funding. Perhaps this is why the repurchase rate has cooled from around 25 to 13 today. Gold has also enjoyed a recovery in Asia after having printed a low of 1,270. The precious metal has climbed to around 1,291 but we feel any moves back into the 1,320 region will be used as an opportunity to sell in the near term. AUD/USD is just holding onto the 0.92 handle after having experienced one of the sharpest drops in the FX space. In the near term investors should keep an eye on lows in the 0.92 region for support. Rallies back to 0.932 would be an opportunity to sell.

European markets experienced some sharp drops yesterday as they reacted to the Fed developments/tapering fears and disappointing data out of China. Economic data released in US trade including the Philly Fed manufacturing index (strongest headline print since April 2011) and existing home sales came in well ahead of expectations, supporting the notion that the US recovery is on track. The dollar index spiked through 82 and this strength in the USD caused a significant selloff in various asset classes.

EUR/USD has held fairly steady in Asian trade and is currently sidelined at around $1.323. The single currency will be back in the limelight with a developing story headline suggesting the IMF is preparing to halt Greece payments unless a €3-€4 billion shortfall is plugged and we suspect this will gather momentum today. There isn’t much on the economic calendar today, with the region’s current account balance the only data to look out for. The market consensus is a €15.1 billion surplus and it’s important to get a good reading to avoid igniting concerns about the region, especially when global markets are this fragile. As it stands we expect to see a mildly positive open for European markets but there is always a risk of further selling, particularly heading into the weekend. We suspect most of the moves in the FX space in the short term will be mainly US dollar driven.

The  ASX 200 is well off its lows, currently trading down 0.6% at 4728. As we approach breakeven for the year, investors will no doubt start thinking about bargain hunting in this market. However, there is still significant downside risk particularly on the China front. Should the USD maintain its upward trajectory, there will also be a burden on commodities.

Materials are the worst performers as the slump in gold takes a toll on the sector. Newcrest Mining has shed 5% and even briefly ventured below $10. Other gold names like Medusa Mining (-9%) and Silver Lake (-15%) are also languishing due to the weaker gold price and investors are not too keen on iron ore names despite the rise in iron ore prices. BHP has lost 0.5% and RIO is down 0.6% while Fortescue has plunged nearly 3%. The banks are in a similar position with losses of around 1% for most of the big four. However, there are some bright spots in the healthcare space with gains for USD stocks like CSL Limited and Resmed.

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