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Asia morning update: Risk appetite returns

In the current consolidation phase for markets, we have seen yet another turn of sentiment that pushed overnight markets higher. 

Trading
Source: Bloomberg

Asian markets are expected to follow in the footsteps of gains in the US, underpinned by positive expectations on global economic conditions.

Passing the stress test

US markets climbed from the depths it had fallen to on Tuesday, with broad-based gains supported by a return of risk appetite. Leading gains on both the Dow and the S&P 500 index had been the financial sector following the clearing of the Fed’s stress test.

Tuesday’s deviation for the financial sector from the broad decline had been an indication that markets had prepositioned for a positive result. The eventual confirmation of the first positive result for all 34 firms since its commencement nevertheless reaffirms the belief that the financial sector is on a firm footing, giving rise to the 1.6% rise of the said sector in the S&P 500 index on Wednesday.

This set of result could certainly support the bank deregulation bill in its Senate bid, though the extent may be limited with the Democrat opposition expected. Most notable in the near-term, however, is the fact that bank shares may take off further from the post-election consolidation phase as the likes of Citigroup, JPMorgan Chase and Bank of America channels their pay-outs to dividend and repurchases alike.

European led optimism

Stealing some attention from the much awaited stress test had really been the volatility generated by remarks from central bank leaders in the ECB forum yesterday. As ECB President Mario Draghi meandered through the reactions towards his speech on Tuesday, Bank of England (BoE) Governor Mark Carney and Bank of Canada (BoC) Governor Stephen Poloz took to the hawkish end. Specifically, BoE Governor Mark Carney’s indication that a rate rise may be in the works certainly triggered a reaction in the currency market with GBP/USD jumping to $1.2950 levels while the FTSE 100 slipped in reaction.

Using gold as a gauge of risk sentiment for the markets, it may be interesting to note that we could be seeing the first monthly decline in prices for the safe haven asset this year, though I would regard the current trend as retaining consolidation. While markets recognise that many advanced economies may soon follow the Fed's footsteps to removing some of the accommodation, the conviction is not strong at the current moment and this hedging with gold could retain into the end of the year.

Asian market

For the day ahead, gains for Asian markets could certainly be expected with the abovementioned leads. Additionally, oil prices have also ticked up overnight, contributing to the party of positive leads. Early movers including the KOSPI 200 and TAIEX have worked to retrace yesterday’s losses. A light day for Asia sits ahead once again. US Q1 GDP (final reading) will be due today, though I would not be surprised to find the market shrugging off the backward looking piece of data.

Yesterday: S&P 500 +0.88%; DJIA +0.68%; DAX -0.19%; FTSE -0.63%

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