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The bleeding in risk markets just won’t stop. Overnight markets in the Europe and US had a terrible day, where sentiments around a ‘drunk’ Asia spilled over. Oil futures were sold off and the VIX index spiked 6%, investors generally sought a flight to safety. Developed sovereign bonds were bought. 10-year US treasury yields fell below 2%. Japanese yen was popular and strengthened to a year’s high.
S&P 500 fell as low as -3.7% at one time, but the fact that it pared losses into the close may meant that buyers are still interested at dips. This should provide a morsel of sorely-needed confidence into the equity markets in Asia today. But don’t expect a miracle. At best, we may see short-covering interests lifting Asian stocks.
It is not advisable to interpret any rallies as evidence that we have seen a near-term bottom. As disciples of technical analysts know very well, a downtrend is typically marked by periods of rebounds, so as to keep the downward momentum.
Hong Kong should remain in focus. Without a doubt, the resolve of the HKMA will be tested again as USD/HKD keeps pushing the 7.85 upper limit. Hong Kong is often seen as a proxy for Chinese plays. Previously, when China imposed heavy-handed measures to lock down a Chinese stock market that had gone awry, investors turned to Hong Kong stocks. H shares, in particular, to express their views, due to the territory’s relatively free trading markets.
It is no different this time. The inability to place short bets on the offshore renminbi forced speculators to turn towards the HKD. The risk-reward is rather attractive for such a bet. At worst, the USD/HKD falls back to the lower limit at 7.75, but if the peg is abandoned, the upside could be huge.
Nonetheless, it is worthwhile to remember that the HKMA does have a massive war chest to defend the peg, and has a track record for absorbing short-term pain to maintain the currency board. In other words, it could be a long wait.
- US and European indices closed in red. The Dow lost 250 points, dropping -1.6%. The S&P 500 gave up 22 points to close down -1.2%. The silver lining is that the buying demand is strong at dips, which suggest that we need a more forceful impetus for sellers to push lower. 15,000-15,500 will be a key support barrier.
- The Baltic Dry Index continues to decline, deepening towards 350. The index is way below the GFC level at around 650-700.
- 10-year US treasury yields sank below 2%, as markets sought safe-haven assets after an awful night for risk assets.
- Oil prices slump in the overnight session, which saw energy stocks hit hard. WTI crude plummeted -6.7%, on extremely thin volume but rebounded sharply this morning. Brent fell 3.1%. API reported that US crude supplies increased by 4.6 million barrels last week, and estimates from Bloomberg show a forecast of 2.2 million barrels in tonight’s EIA weekly report.
- The consensus for the ECB policy meeting later today is an unchanged decision, which was reinforced by comments from several ECB governing council members, saying that the QE programme is working as core inflation is more in equilibrium compared to the oil-driven headline inflation reading.
*For more timely quips, you may wish to follow me on twitter at https://twitter.com/BernardAw_IG