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Relief rally in Asia?

Asia is likely to end the week with better risk appetite than when it started, although the mixed performance from the overnight markets suggests that any risk uptake today may be restrained.

China Flag
Source: Bloomberg

In addition, market players might not be keen to take on more fresh positions ahead of the weekend.

This is understandable given that the first two trading weeks of 2016 begun horribly. The good news this week would be that China seems to be having early success in reining in two developments.

Firstly, yuan stabilises after a depreciating move that stirred the hornet’s nest, also known as currency war fears. Secondly, Beijing managed to close the yawning gap between onshore and offshore yuan via aggressive buying of CNH from state-owned banks. This has the effect of draining up supply of CNH, which saw interest rates for the offshore yuan surged over 50 percentage points.

Chinese equities ended with gains yesterday, but on a year-to-date basis, they were down in double-digits. The Shanghai Composite (SHCOMP) at -15%, and the CSI 300 at -13.7%.

Oil prices recouped some of its losses yesterday, but started today under pressure again. This means energy and material sectors may not get as big a reprieve as expected. The Bloomberg commodity index remained capped below 75, hovering near the all-time lows. Global demand and supply continues to submerge in a disequilibrium state, where the over-supplied condition still persists.

Tellingly, early movements in ASX and Nikkei showed very mild gains, underscoring the caution market participants are clutching close to their chest.

 

Markets

  • US stocks rebounded. S&P 500 regained the 1900 handle, chalking up +1.7%. The Dow was up +1.4%. European indices however fell, as corporate earnings spooked investors. The auto sector was a huge underperformer, with Renault shares tumbling 10.3% as the carmaker confirmed that its offices were searched last week amid a fraud investigation.

 

  • Minutes from ECB showed that some committee members wanted a larger cut to the deposit rate in December.

 

  • The dollar index continues to oscillate near the 99 mark, which kept EUR/USD and USD/JPY steady. Lower expectations of another rate hike by March kept the lid on dollar strength. The market is pricing in a one-third chance of a 25bps rate hike in March, compared to 41% last week.

 

  • The VIX index fell only 5% to 24, indicating that there is still significant fear in the markets.

 

  • PBOC had another steady yuan fixing at 6.5637 from 6.5616 previously. In Australia, November home loans surprised to the upside, growing +1.8% MoM against consensus of -0.5%. Singapore’s retail sales during November is due in the afternoon, where the estimate is for +0.3% MoM seasonally adjusted; +3.4% YoY. Economists expect auto sales to prop up overall retail sales.

 

 

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