Relief rally to wash over Asia

The US appears to be lining up their ducks in a row. Data released yesterday surpassed expectations, which gave a boost to US stocks during the overnight session. 

US Markets
Source: Bloomberg

Q2 US GDP was significantly revised up from 2.3% q/q, to 3.7%, beating expectations of 3.2%. The jump was primarily driven by stronger growth in gross fixed investment and government spending, while improvement in consumption and net exports also contributed to a smaller extent.

While the data is backward-looking, the upgrade would bolster the Fed’s view that the Q1 weakness was transitory.

This supports the case for data-dependent Fed in its rate normalisation plan. In the run up to the September FOMC meeting, every data point will be scrutinised in the broader scheme of things. Meanwhile, weekly initial claims were also lower than estimates.

All of this is providing a silver lining beneath the seemingly relief recovery in global stocks after the recent rout culminated on ‘Black Monday’. The S&P 500 rallied 2.4%, nearing the key 2000 level. Likewise, the Dow also jumped 2.3%, closing above 16500. However, the US stock indices only recouped half of the 10% losses which  incurred between 19th and 25th August.

Notably, oil surged over 10%, the largest one-day gain in over six years, on the back of better US data. Wednesday’s data from the EIA showing easing US stockpiles also helped allay oversupply concerns. WTI climbed past $40, advancing almost $4 to around mid-$42. Brent leaped $4.42 to $47.56 yesterday. However, the fundamentals remained generally unchanged.

Elevated US crude inventories, higher OPEC production, and slowing global growth suggest that the supply glut may persist for the rest of the year. This means any rally in oil prices may be an opportunity to sell.

The relief rally in global stocks continued to fuel the dollar resurgence. The dollar index extended higher above the 95.0 handle, adding pressure on other majors. EUR/USD slipped below 1.1250, while USD/JPY rose above 121. In Asia, USD/SGD remained tight around the 1.40 level whereas THB remained heavy at mid-35. USD/CNY was slightly higher, remaining above 6.4000, after higher midpoint fixings by the PBOC in the past two days.

Looking ahead to Asia

We should see more investor appetite for riskier assets today, given the positive leads from the overnight markets. However, the market may be wary of putting in sizable positions ahead of the weekend. Nonetheless, it is clear that the mood has shifted to calmer waters. The CBOE VIX index fell further to 26.10.

In China, Bloomberg noted that the authorities have intervened in the stock market yesterday and have been selling US treasuries this month to defend the yuan. This was because the government wished to stabilise equities ahead of a military parade on Tuesday 3 September.

Furthermore, China announced that the debt swap quota for local governments will be expanded to CNY 3.2 trillion. What would be of interest to investors is the 10am State Council’s policy briefing where officials will be answering media questions on the recent announcement that pension funds will be allowed to invest in domestic equities.

The Shanghai Composite saw a late jump of around 5% in the last hour of trade yesterday, presumably due to state buying, and closed above the 3000 level. This level would now be a key support to watch. Another close above this level would be positive for Chinese equities going into next week.

Singapore is expected to ride on the relief rally today. The Straits Times Index (STI) was capped below 2950 yesterday and is likely to surmount this resistance today. Breaching this level would bring the 3000 barrier into view.

According to Bloomberg, Olam said that Japanese trading house Mitsubishi Corp is planning to purchase more than a 10% stake in the commodity firm. Under the deal, Olam would issue new shares to Mitsubishi. Temasek will still remain as Olam’s largest shareholder after the deal. Trading of the Singapore-based commodities trader’s shares was halted yesterday morning, pending an announcement.

Finally, Japan CPI continued to stay low, primarily due to weaker oil prices. Bank of Japan’s (BOJ) preferred inflation gauge, CPI less food, and exclude consumption tax hikes came in flat for July, from a 0.1% gain in the previous month. Forecasters were expecting a 0.2% drop.

Yesterday, BOJ governor Kuroda reiterated that the current level of monetary stimulus is sufficient for Japan to achieve its 2% inflation target, although the central bank stands ready to adjust policy if needed. In contrast, most economists expect the BOJ to ease further, as inflation trajectory continues to undershoot while the domestic economy is struggling to recover.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Find articles by analysts

Een artikel zoeken

Form has failed to submit. Please contact IG directly.

  • Ik wens per e-mail informatie van IG Group bedrijven te ontvangen over handelsideeën en IG's producten en diensten.

Voor meer informatie over hoe wij uw gegevens mogelijk kunnen gebruiken, bekijkt u ons Privacy- en toegangsbeleid en onze privacy website.

CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen. 79% van de retailbeleggers lijdt verlies op de handel in CFD’s met deze aanbieder.
Het is belangrijk dat u goed begrijpt hoe CFD's werken en dat u nagaat of u zich het hoge risico op verlies kunt permitteren.
CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen.