Bears take control of Asian markets

It’s hard to say price action on the S&P 500 was anything other than negative yesterday, but the bears are clearly roaring the loudest right now.

There really isn’t much new news other than valuation concern, especially after regional Fed president Dennis Lockhart joined James Bullard in detailing that one poor payrolls report doesn’t make a trend. Mr Lockhart’s comments though did have a negative effect on the index and perhaps the combination of weak payrolls, a continued taper and above average valuations (I’ve looked at the five-year average) is the excuse needed to cause a pullback. Certainly from a sentiment perspective (which of course is a vitally important component in short-term trading), it seems that confidence is slipping and thus the bears will be eyeing a more protracted move to the November 29 high of 1813, ahead of the 50-day moving average at 1801.

Two key near-term events which could see this support being tested will be JP Morgan (JPM) starting the ball rolling on what many feel is the real beginning of Q4 earnings season. We also get to hear from regional Fed presidents Charles Plosser and Richard Fisher, who speak just prior to the close. Given they are both hawks (and voters this year), we could easily see US stocks headed lower again, with the prospect for better days for the USD if they give another hawkish assessment. It’s also interesting to see that the Dow has seen two 100-point moves this year, when we didn’t get the first 100-point sell-off until early April.

JP Morgan in play tonight

JP Morgan is starting to roll over and the five-day moving average is in decline, presumably as a function of a flattening yield curve, as well as the general risk off thematic. It’s worth bearing in mind that JPM has fallen on four out of the last five earnings reports; still,  the bulls will be keen to buy the stock in droves if it does miss and heads to $50, given the strong support seen here. Q4 adjusted earnings are expected to print $1.37, on revenue of $24 billion.

Asia has been lower all day, although China did open up a touch stronger, but has found sellers as the day rolled on. The Hang Seng didn’t follow the mainland’s lead and opened sharply weaker, while the Nikkei played catch up after being closed yesterday, pricing in offshore moves, but more importantly the liquidation of a fairly crowded long USD/JPY position.

Japan’s November trade and current account data has been in full focus today. On one hand we saw Japanese funds buying US treasuries for a fifth month, while we also saw huge quantities of French, Italian and Australian government bonds, which is extremely positive for ‘Abenomics’, as it highlights huge the quantities of funds that flow into other economies (which of course is negative for the JPY and good for the Nikkei). We also saw the current account (adjusted) show a deficit for the third month in a row. There hasn’t been a major move in the JPY on the back of this, but Japan’s current account surplus has been a major source of strength for many years, so take this out of the equation and it highlights the attractiveness of the JPY as a funding currency for the carry trade.

Relationships between China and Japan about to play a bigger role in affecting sentiment?

It’s worth highlighting the meeting of 60 defence officials in Singapore over the last few days. One of the key talking points was around the deteriorating relationship between China and Japan and what (if anything) can be done to ease tensions ahead of official meetings in June. I have no idea what, if any conclusions have been reached, however over the next few weeks these tensions could re-surface and may play a bigger part in affecting sentiment. Talk that Japan is set to register 280 islands as its territory should bring out a reaction from China. The question is, exactly what is likely to materialise? There has been talk that we could see China claim the Philippine occupied Zhongye Island, and from here the reaction of the US will come into play given the two countries have become quite friendly of late. As said, this is very much a ‘watch this space’ type scenario and while Japan-China tensions are not new, it must be said the market is not pricing in an escalation of tensions at all, and this concerns me.

The ASX 200 has also been offered all day; with the index being down over 1% there really hasn’t been anywhere to hide, with all sectors lower and 90% of stocks down on the day. The telco space has been the best place to be invested, with the sector ‘only’ lower by 0.9%. In terms of the AUD, the local unit has held up well against the greenback, but I’ve taken profits on my potential long AUD/NZD trade, as it’s just too risky holding longs ahead of the January 31 RBNZ meeting. After today’s NZ business confidence print (the highest in decades) a strong Q4 CPI print next week could easily see the RBNZ hike rates and thus could be the first G10 central bank to raise rates. Considering the markets are pricing a rate hike as a 50:50 affair, holding longs right now is far too risky.

European markets are going to see strong downside on the open, following the poor finish on Wall Street, while our clients have been better sellers today as well. While the US will play a central focus today, especially with December retail sales due, from an FX perspective, traders will be keen to see December inflation figures from the UK. Cable has started pulling back a touch, with traders feeling the BoE is likely to strengthen its forward guidance for raising the cash rate, especially with its jobless rate falling to 7.4% - 40 basis points above its threshold for hiking. There is a belief that the central bank will lower (or I could say strengthen) this guidance at its next inflation hearing (on February 12) to perhaps 6.5%, however with inflation on a downward trajectory, it will still be keen to keep an eye on this metric. A number below 2.1% on the CPI print should send sterling lower.

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