China and Japan lead Asian recovery

After a lacklustre start, most of the major markets in the Asian region have turned positive despite a lack of leads to drive sentiment.

Source: Bloomberg

Markets in China have somewhat found their footing after a dismal session yesterday. While there hasn’t been much data for the market to work off, it seems the improvement in sentiment in US trade was enough to see glimpses of positive momentum in Asia. A pullback in energy prices has also been quite positive for markets with a slight downgrade to geopolitical tension in Iraq.

News that Iraq’s army enjoyed a minor victory after recapturing some territory from militants saw Brent prices retreat from their recent highs.  However safe-haven plays have not quite unwound which indicates there is still a degree of risk lingering.

USD/JPY has comes off its Asian session lows but still remains capped by the 102 level. This has also limited the Nikkei’s gains today, although it’s encouraging to see it pop back into positive territory. Comments by Japan’s government adviser Takatoshi Ito suggesting the government should consider sitting on cash after selling JGBs did not deter the bounce in Japanese stocks. There continues to be plenty of speculation around how the government will use its cash holdings after selling bonds and the general consensus is this money will go into stocks. This is likely to continue underpinning Japanese equities in the near term.

Gold testing downtrend

Gold hasn’t done much in Asia today and continues to test a downtrend resistance, which has been in play on the weekly chart since October 2012. This line currently comes in at around 1320 and presents a serious challenge for the bulls. The positive news out of Iraq will not do the gold bulls any favours at the moment.  There will also be a lot of focus on the US dollar and its impact on gold. There hasn’t been much movement in the greenback so far this week but there is plenty on the calendar to look out for. Yesterday flash manufacturing PMI and existing home sales both came in ahead of expectations.

Today we have the Case-Shiller house price index, conference board consumer confidence and new home sales due out. Most of the data this week will help shape up the outlook of the US housing market. Fedspeak will also ramp up today with Plosser and Williams both speaking on the US economy. Treasury Secretary Lew also speaks but this is unlikely to get as much attention as the Fed members.

Flat open for Europe

Looking ahead to European trade, we are calling the major bourses relatively flat. This is quite disappointing considering we already saw some fairly hefty losses yesterday. Investors continue to show disappointment in the lack of progress after yet another round of disappointing PMIs. The calendar is quite light today with the German Ifo business climate being the only major release to look out for.

There will be a bit of activity in the UK, with the pound remaining one of the stronger currencies at the moment. GBP/USD remains above 1.7000 in Asia with traders seemingly just waiting for a catalyst before pushing the pair higher. The pair broke through 2009 highs over the past week and perhaps the rapid rise warrants some caution in the near term. Later today we have inflation report hearings and mortgage approvals data out of the UK and this should give the sterling some direction. Yesterday’s Q2 credit conditions survey showed demand particularly for mortgage lending and corporate credit is increasing rapidly, with default rates falling. These will remain key factors for the UK economy and could see expectations of a rate cut ramp up sooner than the market thinks.

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