Wind beneath my wings

With US stocks rebounding 1.8%, and mild gains from European markets, we could see some wind keeping Asian equities airborne today. 

German Stock Exchange
Source: Bloomberg

Without China to provide guidance, improved sentiments from the Street would provide trading clues for Asian investors. However, regional risk events might also provide some impulse to price action.

US took on a relief rally yesterday and as suspected, Beijing support stabilised Chinese equities. The S&P 500 and the Dow added 1.8% each, but remained lower on the week. Overnight US labour data was uninspiring.

Nonfarm productivity in Q2 grew 3.3% q/q annualised, revised higher from the preliminary reading of 1.3%. However, the number of hours worked were not considerably higher despite the recent upward revision to Q2 GDP. Meanwhile, the ADP report showed that 190,000 jobs were added to the economy in August, which is more or less in line with recent readings.

Cautiously optimistic

Nonetheless, the market participants continue to feel a sigh of relief, and this is reflected in better risk appetite. US stock index futures tread higher, longer-dated US treasury yields rose 1-4 basis points, and oil prices were supported. However, the modest uptake in risky assets underscored the cautious tone. I expect the cautious undercurrent to dictate trade in Asia today.

ECB in focus

While the Fed has hogged the limelight for some time as we head towards the September FOMC meeting, ECB recently garnered some attention. Many investors are worried that the ECB’s inflation target is under threat from weak commodity prices and slowing global growth.

The Eurozone PPI dropped for the second straight month in July, at -2.1% y/y (Prev: -2.1%). This reinforced the view that the massive EUR 1.1 trillion quantitative easing (QE) programme might need to be expanded to stoke inflationary pressure.

Most economists are not expecting any changes to policy at the ECB meeting tonight, but it is worth to keep an eye or ear out for any language relating to QE expansion. In the press conference, ECB President Mario Draghi would release new forecasts for growth and inflation. Needless to say, if these latest forecasts are lowered from the previous estimates, the chances of future policy action will increase.

The euro has been one of the beneficiaries of the recent wave of risk aversion affecting global markets. Investors unwind their carry trades, where euro was used as a funding currency, and held on to the single unit currency. However, the euro was hit by speculation of more ECB easing yesterday. EUR/USD slipped to low-1.12, and remained thereabouts in early Asia.

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