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Oil bounce clears palate of risk appetite

Markets look set for a solid day in Asia after the ECB-fuelled two-day rally last week.

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Source: Bloomberg

Speculation around further easing by the Bank of Japan at their meeting this week is likely to see further gains in the Nikkei. But the rebound in global commodity prices looks set to help the Aussie market today. Good performances by BHP and CBA’s ADRs on Friday is pointing to a decent open on the ASX, with the market set to open up more than 1%. If strong gains around the region are not destabilised by the Chinese cash market open, perhaps 5000 could be in play for the ASX today.

ECB easing

Draghi’s announcement last week that the ECB may look into further easing measures at their meeting in March provided the fillip for the major two-day rally in oil. One should bear in mind that the market was so heavily short that even if only a small percentage of those contracts were covered it would have led to a minor rally. Draghi provided the proximate cause for the short-covering rally.

Oil and China

But the two major unknowns in the oil market have not yet reached their denouement: the rate of new Iranian output and China’s slowdown concerns. The market will be watching very carefully to see how quickly Iran can rebuild output capacity and probably will need a couple of months to fully price this in. China may be less of a concern for markets over the coming weeks as they go offline for Chinese New Year. But as Q1 activity data starts being released in March and April, markets could be in for a nasty shock as the seasonally weak Q1 has all the indications of being particularly bad this year.

The Fed

The Fed and Bank of Japan will be keenly in focus this week. Markets will be watching the Fed statement to start pricing in the most likely date for the next rate hike. The Fed will no doubt try to keep March and April nominally in play, but at the current juncture no one expects more than one rate rise this year, and not until 2H.

Japan

Speculation about a possible further easing move by the Bank of Japan provided a huge 5.9% bounce to the Nikkei on Friday. Trade in the yen has been somewhat more circumspect, but it still gained 1.5% on Friday. Speculation clearly reached fever pitch on Friday when BOJ governor Haruhiko Kuroda was interviewed on Bloomberg TV and the yen traded wildly back and forth on every statement he made.

It should be noted that the BOJ has consistently disappointed market expectations for further easing over the past couple of months and they are more likely than not to leave their policies unchanged. However, given the current climate, the Japanese trade data out today has the potential to be far more market moving than usual. A big drop off in exports will likely be attributed to strength in the yen, possibly fuelling further speculation in the markets the BOJ may be forced to move this week.

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