Risk assets on back foot again

Four markets in focus today: Volatility index, Japan 225, China A50 cash and Fortescue Metals Group.

Volatility index (VIX)

The index has settled down of late, however we could be in for a week of heightened volatility given concerns around Chinese growth and the upcoming Crimea referendum. There could also be volatility in USD/CNY as well, which could throw risk sentiment about and hurt emerging markets as well. I feel investors will look to pick up some protection from the concerns and around 15.5 on the Volatility March contract could be a good entry point to long positions.

Japan 225 (Nikkei)

The index should open with a defensive tone, despite a strong USD/JPY on Friday. USD/JPY has opened on the back foot in early Asia trade, and to me this gives a clearer indication of the index open, with traders preferring to be long the JPY in times of stress. At 10:50 AEDT we get a whole raft of data, with final Q4 GDP (expected to be revised down modestly to 0.9%), while we also get the January current account, which will be predominantly driven by a worsening of the trade deficit. USD/JPY closed above the January downtrend and looked fairly constructive, so it will be interesting if the bulls can support today.

China A50 cash

Price action in China markets should be very interesting, with cheap valuations supporting, while sentiment could work prove to be a negative. The weekend data was poor and despite some putting the numbers down to seasonal factors, the sheer magnitude of the miss in the export print will clearly hurt. Exports fell 8.1% from a year ago (with economists looking for a 7.5% increase), however when you combine both the January and February figure, the fall was still 1.6%, which is the largest decline since 2009. Inflation both at a business input and consumer level was hardly compelling either, so we could see both weakness today in the stock markets and the RMB. Certainly the weakness in the RMB may have actually driven the weak export, which reflects the large levels of capital outflows.

Fortescue Metals (FMG)

Iron ore is one of the more talked about commodities on the floors these days, with the spot price falling to $114.20 on Friday; down 2.3%. Futures traded on the Dalian exchange were savaged as well, while steel rebar futures fell 2%. Talk from CISA is that prices could go lower as the expected increase in China’s steel output is unlikely to offset the huge oversupply of iron ore. Iron ore is now in bear market territory, having fallen 20% from its August 2013 high. In saying that, the price of iron ore could find strong support around $110 given recent comments from Vale in February around this.

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