On the daily charts, we can see the Nikkei 225 just holding the 200-day moving average at 21,160, so a close through this longer-term average today could be quite telling from a psychological point of view. USD/JPY is testing the ¥107.49/32 area (July 2016 high and 8 September low), where a closing break would open up a move into ¥105.00 and would certainly not be taken well by the Japanese equity market, despite the correlation between the JPY and the Nikkei 225 breaking down in recent times. CAD/JPY is another on the radar, where price is holding the August significant lows and looks destined to break through, where traders should respect and follow this break.
Whether this selling further plays out today is yet to be seen and our call from the Nikkei 225 open sits at 21,170, so a touch weaker. However, traders are on edge about political developments, involving not just the probability that Governor Kuroda is reappointed when his term expires in late March, where most still feel this is a likely scenario. However, after Prime Minister Abe’s comments yesterday that the government has a “blank slate for choosing the next BoJ governor”, whether Etsuro Honda is actually realistically in the running. Now, considering Honda is even more of a monetary policy dove than Kuroda (if that is possible), the strength in the JPY suggests markets are becoming very agitated about continued ultra-loose policy and the manipulation of markets and the longer-term negative effects. As we head into March many will be focused on the Italian election, but it seems that perhaps the volatility event is actually the Japanese central bank reappoint.
Moves in Japan could influence sentiment more broadly across Asia, where US equities have overlooked a fairly drab European trading session (the DAX fell 0.7%), rallying off the cash session low of 2635 and currently sitting up 0.24% as I type. We can see somewhat calmer conditions in play, with the US volatility index (VIX) tracking down a touch at 25, which is in-line with the VIX front month futures contract and we can look out and see a flatter VIX futures curve. The intra-day range has settled down, as it has in the Dow Jones index and we can see a little move in the US fixed income market, with the US 10-year Treasury one basis point lower at 2.84% and no real move in the 2’s vs 10’s Treasury curve. High yield credit spreads are a touch wider relative to risk-free rates and traders have been using the HYG ETF (iShares High Yield ETF) as their weapon of choice here, where we see the HYG ETF 0.4% lower and still holding below the 5-day EMA.
Of course, this relative calm comes ahead of the highly anticipated US core CPI and retail sales report, which are both due at 00:30 AEDT in the US session ahead. The algo’s will be all over this number and one suspects a core CPI print above 1.9%, which seems unlikely relative to consensus of 1.7%, and the result will be a steeper US yield curve, with 10-year Treasury’s pushing through 2.90%, which, in turn, will take ‘real’ yields higher. Subsequently, the USD will fly and stocks will find a wave of sellers as implied volatility spikes. That’s a big ‘if’ and the fact we are seeing modest buying of Treasuries, while the USD index is 0.5% lower today portrays market who is firstly (and correctly) limiting their exposures to this data point and also seeing, on balance, downside risks to this inflation call. The higher probability outcome is we see core inflation print inline at 1.7% and the retail control group at 0.4% (consensus) and therefore, in theory, we should see little reaction, but we live in interesting times and these data points are potential volatility events.
A weaker inflation read would also be a confusion for the market, because the script from economists is that inflation is rising and spurred on by the increase in the budget deficit certain US investment banks have raised their calls for four rate hikes this year from the Federal Reserve. A weak inflation read, backed with lower oil prices which could keep future inflation reads subdued could have a few asking questions if the move in long-end rates is perhaps a touch overcooked.
I detailed we are seeing a weaker USD index, but this is largely a product of relative EUR strength, with EUR/USD currently trading at $1.2350 and this comes before we see German European GDP (consensus at 3%) and CPI numbers (1.6%) at 18:00 AEDT, as well as Italian and the broader Euro-region GDP figures at 20:00 and 21:00 AEDT respectively. AUD/USD is eyeing Westpac consumer confidence at 10:30 AEDT, although this is unlikely to cause too big a reaction and the indecision seen in the daily chart is a reflection of tonight’s US CPI and tomorrows Aussie jobs report. EUR/AUD is again eyeing a break of the 1 December high and for the fifth time has tested AU$1.5771 but lacked the impetus to break through.
The local equity session is looking set for a flat open, which is something we haven’t seen for a while and our call sits at 5850. Depending on earnings, there is scope for the market to push through yesterday’s highs of 5858, which would see 5980 come into play. However, with the potential for another big night in US equity markets, perhaps conviction behind the buying may be missing.
In terms of inputs, we can see spot iron ore has gained 1.5%, iron ore futures are up 2.2%, while oil is unchanged, while copper is looking quite perky and finding good buying activity. The gains in the S&P 500 have largely come from financials and tech, so that won’t do too much to inspire locally, but earnings might and it’s a big day on the reporting calendar with CPU, CSL, DMP, IAG, ORA, VCX and WPL some of the names likely to be singled out here. CSL looks interesting with the market expecting solid 1H profit growth of just over 4%, with the top line growing around 6%, and where good numbers should see the stock heading back to $145. A break of support into the December lows of $139.45 would be of interest to looking at shorting ideas.