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Sentiment improves ahead of US jobs

It has been mixed day for Asia with Hong Kong returning to trade from a break on a relatively downbeat note. 

US
Source: Bloomberg

However, it is encouraging to see the ASX 200, Nikkei and Hang Seng all off their lows. While equities were absolutely hammered in Europe, a turnaround kicked off in US trade and this seems to have spurred Asia on. Asian trade itself has been very quiet with a bare economic calendar and with the Shanghai Composite not trading.

With the ECB meeting now out of the way, investors are now looking ahead to the US non-farm payrolls data with plenty of optimism and we can see the USD finally get out of its recent stall. USD/JPY has been the biggest mover, recovering strongly after having tested a key uptrend support line in the ¥108.00 region. After having been massively overbought, the pair had pulled back a big figure over the past couple of sessions and it seems the bulls are coming back in to sweep up positions at lower levels.

After recent comments by Fed members who increasingly sound more hawkish, this week’s non-farm payrolls data will carry significant weight and go a long way towards shaping rate hike expectations. After a slump the previous month (142,000), non-farm payrolls are expected to bounce back strongly with a reading north of 200,000. Analysts feel a strong reading today could then see the Fed drop its ‘considerable time’ reference as far as rates lift-off is concerned. This month’s FOMC meeting will also be when QE wraps up and therefore is likely to be pivotal for the greenback. At the moment everyone is still working off the dot plot analysis and trying to find a median.

Equities come off lows

As USD/JPY recovered, so has the Nikkei which has been under significant pressure over the past couple of days, dropping below the 16,000 level. The ASX 200 was on the verge of printing six consecutive negative weeks, but the recovery it’s currently seeing has seen it edge into positive territory. 

However, the worrying fact on the ASX 200 is that today’s gains have purely been yield driven, while the materials just continue to lag. With the volatility we’ve seen in the banks this week, it makes it difficult to determine whether this is a sustainable recovery or not. By all means this market remains very fragile.

Europe to digest ECB comments

Looking ahead to European trade, we are calling the major bourses firmer with a bit of a recovery after yesterday’s sharp selloff. The [indicesLDE30|DAX] will be closed in observation of Unity Day and this will limit activity in the region.

Investors will continue to digest results from yesterday’s ECB meeting and press conference. The immediate reaction reflected that the market feels the language was less dovish. Analysts believe Mario Draghi took a step back as he failed to say that the committee is ready to adjust the size and composition of purchases. However, I feel it was always going to be a tough job for the ECB to keep the doves appeased. A wait-and-see approach is probably the way forward for the ECB as it assesses the impact of recently announced measures.

The second allotment of the TLTROs in December is likely to be the next key event for the eurozone and the uptake will really need to pick up this time. The fact that the ECB will start buying covered bonds this month, as well as asset-backed securities in Q4 should help sentiment. Additionally, Mr Draghi also left the door open for QE – although some in the market feel this is still unlikely. For now though, I feel there is room for further euro downside and the bounce in EUR/USD is only likely to present fresh selling opportunities.

 

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