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As German Chancellor Angela Merkel detailed overnight, ‘we don't yet have the necessary progress, one even has the impression that we’ve regressed a bit’. One giant step forward, two small steps back.
What we do know is there are still wide differences between the Greek and EU negotiating teams. We also know talk of ‘Plan B’ has ramped up and that the majority of the key players still see some form of agreement, which according to one Greek official should get through the Greek parliament. The Germans have stated they will use the IMF as their guide and, if it’s good enough for the IMF, then it will be good enough for the Germans.
We also know that markets did absolutely nothing in European and US trade, with the Eurostoxx 50 unchanged and the S&P 500 closing on the lows, down 0.3%. It’s interesting to see the VIX pop 6.5% to 14.1% despite the low intraday ranges, so it seems someone was buying put option protection ahead of the weekend and potential for gapping risk on Monday. Will this same concern play out in Asia today? I suspect it might.
In the last eight hours or so EUR/USD has traded in a 40-pip range, with AUD/USD in an even more lethargic 26 pip range. The average daily range over the last 14 days in these pairs is 117 and 80 pips respectively, so you can use that to benchmark the lack of volatility. The fact German 10-year yields were up two basis points while Spanish and Italian yields barely moved has certainly played into low volatility in the forex market and it’s unlikely data in Asia is going to spur traders into life. Japanese CPI (ex-food and energy) is expected to come in at zero when announced at 09:30 AEST, which won’t surprise anyone given commentary in the recent Bank of Japan narrative.
It seems that the ASX 200 is likely to find follow through selling after yesterday’s 1% sell-off and we are currently calling the open at 5,607 (-0.4%). We saw the index struggle at the 5,700 level on Wednesday and in two sessions we find ourselves 100 points lower and looking for a move back below 5,600. It’s hard to see a situation where the bulls support the open with any real conviction and, as detailed, when there is real confusion in the macro backdrop traders will struggle to put risk on the table.
The fact we saw Chinese markets were sold 3.5% into the close will not provide any encouragement either, while the Nikkei is also looking tired and toppy. Certainly, if we look at the three key macro issues facing traders at present (Greek debt negotiations, a potential normalisation of Federal Reserve monetary policy and the Chinese retail trader love affair with equities). I feel the latter is the most interesting and, in a market struggling with sizeable moves, China is always guaranteed to inject a bit of craziness into the trading day, especially on a Friday afternoon!
One issue in China that is absolutely worth watching, other than the technical correction (of 20%) in the ChiNext index (Chinese retail traders favourite stomping ground), is that we are seeing increasing signs of deleveraging. The use of margin financing fell 2% yesterday, the biggest drop since mid-February. This is also the third consecutive day where the level of margin financing has fallen and, if traders feel they are over leveraged and therefore over exposed, it could suggest a deeper correction. I am not so sure the PBoC would be too disappointed by this.
If we focus back on local issues, BHP’s ADR is suggesting the mining giant will open 1.8% lower, testing the $28.00 mark and this is backed by a 2.7% fall on its London listing. Rio Tinto Ltd fell 1.7%. We can use BHP as a proxy for the sector.
Industrials, discretionary and energy names had big percentage falls yesterday, so it’s reasonable to think follow-through selling will occur in this space again.