Asia trading cautiously ahead of Fedspeak

Last week was a stellar week for global equities, underpinned by some impressive jobs data out of the US, a pickup in global manufacturing activity and ECB comments.

US Federal Reserve
Source: Bloomberg

This ensured we got off to a great start for the quarter and some key resistance levels being tested. For markets to continue this run, I feel we need a further catalyst. There is likely to be some caution this week as we head into earnings season and with a significant amount of Fedspeak on the way. The risk is that hawkish Fed comments could lead to a firmer USD which would weigh on risk.

Already we have started seeing some risk currencies like the AUD start to lose ground to the greenback. Among the Fed members speaking this week will be Kocherlakota, Lacker, George, Lockhart and Evans. Additionally we will have the FOMC meeting minutes released mid-week which could also result in sentiment turn a bit hawkish. Should a more hawkish tone from the minutes and Fed members not materialise, then there is a good chance we’ll see the risk rally continue.

Trade figures for Japan and China in focus

The Nikkei has been the only market threatening to push higher today and I suspect this is due to USD strength underpinning USD/JPY today. However, markets in China and Australia are struggling to hold on to breakeven.

Tomorrow we get Japan’s current account data yet another surplus as activity continues top pick up. Perhaps China’s trade balance mid-week will actually grab more attention as exports are expected to show a sharp improvement to +10.2% (from 7%) while imports are also expected to bounce back to 5.6% as activity picks up. All this makes for an interesting week for Asia and will help shape how emerging markets perform.  

Corporate activity picks up

The highlight of trade for the ASX 200 was further evidence that corporate activity is picking up. WTF has jumped 25% after receiving a $1.84 billion takeover from Expedia. While the deal is a 25% premium to the stock’s last trading price, WTF had been a serial underperformer with some bad management hurting the company’s earnings performance. Long term shareholders would have already been unimpressed by the rapid share price fall over the past year and therefore only short term traders would cheer this move. Expedia shareholders will be happy as the deal represents good value and allows it to increase its presence in the APAC region. Aristocrat Leisure also announced plans to buy Video Gaming Technologies for $1.24 billion as it looks to accelerate growth in US revenue.

The ASX 200 is also now knocking on some key resistance levels after having ascended quite rapidly last week. There is a bit of a congestion zone as highs from April, May and June all converge in this region. The highest point was April highs at 5554.5 and could be a key level in the near term.

Firmer start for Europe

Looking ahead to European trade, the major bourses are facing a relatively flat to mildly firmer open. This could be because equities are due for a recovery after the weakness we saw on Friday.

EUR/USD is back below 1.3600 and a retest of lows in the 1.3500 region following the ECB meeting a month ago could be on the cards. On the European economic calendar today we have German industrial production being the only release to look out for. The main event of the week for the region will be the BoE meeting.

While no change is expected, the minutes are likely to carry some weight as the market looks for further insight on when we could see a hike. As a result the pound is likely to trade cautiously heading into the decision.

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