Asia cautious on Ukraine and Russia talks

While US and European equities powered ahead, equities have been fairly mixed in Asia with some minor downside in play.

Russia Crimea
Source: Bloomberg

The S&P topped 2000 for the first time and this is the headline that made the rounds.

Driving sentiment across the globe at the moment are bets we will see further stimulus from some of the major central banks. As a result, bad data is likely to be taken as a positive for equities in the near term, particularly out of the US, Europe, Japan and China, to an extent.

Janet Yellen delivered a fairly balanced/neutral speech, making it clear policy expectations will be data-dependant. As a result, yesterday’s disappointing new home sales reading turned out to be a minor positive for a market that seems to be looking for any excuse to go up.

Remember we received a few readings over the last couple of weeks which pointed towards a recovery in the housing market. While it seems inevitable we were going to test the 2000 handle in the short term, the conversation switches to whether the run can keep going.

Having said that, the market is trending higher and pullbacks are likely to be used as an opportunity to buy. On the economic calendar we have durable goods orders, consumer confidence and the Case-Shiller index due out. Strong data reads could actually weigh on the market.

Nikkei pulls back on yen strength

Looking around the region, the most notable move is a pullback in the Nikkei. There has been talk of fresh geopolitical developments on the Russia/Ukraine front, with a meeting set to be held later today and leaders looking for a way to end the crisis. This seems to have benefited the yen as some traders are looking for safety. As a result, USD/JPY has dropped back below the 104 level and weighed on Japanese equities in turn.

There is some support in the 15,500 region, and this could be a level traders will be watching for near-term pullbacks. Over in China, markets continue to look for a catalyst to propel them higher after the recent run. There also seems to be a bit of caution heading into Thursday’s industrial profits data.

Materials weigh on the ASX 200

The ASX 200 is relatively flat, with gains in some of the income plays, such as the banks, balancing out losses in the materials plays. These plays are in a bad place right now – concerns are rising around iron ore prices and gold is also coming under pressure from the rising USD.

While this could be the beginning of a pullback, with earnings mostly impressing and investors betting on stimulus, there is potential we could see investors looking to buy the pullbacks. Earnings aren’t great today, but this is hardly a surprise, as stocks that report towards the back end of earnings season tend to disappoint.

A credit rating downgrade for WA hasn’t done mining services names any favours. Of course, developments around BLY are also contributing to this. Banks are helping to hold things fairly flat, with investors focusing on income and CBA’s dividend reinvestment plan.

DAX looks appealing

In European trade, investors responded to Mario Draghi’s comments from the weekend in an overwhelmingly positive way and euro weakness helped to give equities an extra kicker. A disappointing German Ifo August reading also came into play and contributed to weakness for the euro, along with stimulus optimism.

Yesterday, I highlighted buying opportunities in the DAX after recent weakness. It cleared the 38.2% retracement of that big slump from its recent record highs to lows just below 9000. The next level to look out for will be the 61.8% retracement of that move, which comes in at 9610. Bad data is likely to be taken as a positive for equities in the interim and investors could look at riding the momentum.

Looking ahead to European trade, we expect to see a minor pullback in some of the major bourses at the open. The FTSE will be an exception, as it was shut for a holiday yesterday and will be playing catch up today.

There’s no data on the European calendar today but some of the recent key themes are likely to continue, bar any negative developments on the Russia/Ukraine front. EUR/USD is just holding on to 1.3200 and some traders feel it could be in for a near term bounce – the RSI suggests the pair is in oversold territory. However, strength in EUR/USD is likely to be used as an opportunity to sell.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.