Asian equities sold off as risk sentiment slumps

Asia has slumped today, with most markets reversing a huge chunk of yesterday’s gains.

While US markets were also weaker, losses have definitely accelerated in Asia. Confidence in the risk space is under threat from re-emerging Greece and Portugal issues. Tension in Egypt is also causing oil prices to spike and this is generally negative for equities. WTI is up 2.1% to 101.69 and Brent is higher by 0.9% to 104.88. Japan has remained surprisingly resilient in the face of a regional sell-off, with the Nikkei managing to hold its ground above 14,000.

Japan has been a silent achiever this week and has quietly led the region with the Nikkei up 3% for the week so far.  The Nikkei printed a high of 14,350 this morning, but is now relatively flat as the rest of Asia comes off.USD/JPY rallied through 100 and is now trading at around 100.70 and is in a strong near-term uptrend. The next level of resistance is at ¥101 and with plenty of US event risk on the way, we feel there is potential for further volatility.

Later today we have the US trade balance, ADP non-farm payrolls, unemployment claims and the ISM non-manufacturing PMI to look out for. Japan would be hoping to see some strong readings from these releases to spur further USD strength. This would then push USD/JPY higher and in turn support Japanese equities. BoJ Gov Kuroda speaks tomorrow and we could hear some interesting comments, particularly as we approach the upper house elections. China continues to experience weakness with the Shanghai Composite (-1.3%) and Hang Seng (-1.8%) both struggling, and the situation was made worse by China’s non-manufacturing PMI, which fell from the previous month.

Apart from Japan, Australia has been a big mover in Asia today, with the Aussie dollar and the ASX both experiencing some sharp moves lower. AUD/USD was relatively flat heading into Asia today after having been sold off on the back of the RBA yesterday. After yesterday’s comments regarding further weakness in the AUD, we suspected Governor Glen Stevens to ramp up the jaw boning and talk down the AUD today.

We had already seen a disappointing retail sales reading (0.1% versus 0.3% expected) giving further evidence of the slowing domestic economy. A temporary spike in AUD/USD following a much better-than-expected trade balance reading was always going to be greeted by selling.  The support level we were watching today was Monday’s low of 0.9112, which has since been broken with the pair trading to a low of $0.9094. This leaves AUD/USD open for a potential move down to $0.90 in the near term. Gov Stevens lit up the swaps market and now sees a 57% chance of a 25-basis point cut in August and an 83% chance by year-end. He emphasised that the current accommodative stance is warranted and made comments such as unemployment will rise from 5.5%.

The ASX 200 has slumped 2.1% to 4731, with the materials names unwinding yesterday’s gains. Iron ore miners BHP and RIO are over 3% weaker each, despite iron ore being up 2%. Boart Longyear has remained at the bottom of the list as its recent downgrade continues to bite. This is also weighing on other mining services names like Monadelphous, which is 4% lower. Flight Centre is one of the few bright spots today, rising 1.3% as investors react to its profit upgrade. Retailers are under pressure after retail sales data disappointed. David Jones is nearly 4% weaker and Myer is down 3.3%.

European markets are pointing towards a weaker open with sentiment turning sour for the region. Concerns about Greece not being able to secure its next tranche of aid and political issues in Portugal weighed on the single currency, as EUR/USD dropped below 1.30 to a low of 1.296. While the bigger economies in Europe seem like they are on the path to recovery, the periphery just continues to haunt the region. Later today we have services PMIs due out and this could trigger further EUR weakness. Greece is reported to have just three days to reassure its ability to deliver on the conditions imposed on it before receiving its next tranche of aid in August. Positioning is also likely to ramp up ahead of the ECB tomorrow.

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