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The weekend newsflow has centred around two things. Firstly, currency strength fighting rhetoric from the ECB president has increased, and secondly around the emergency UN security meeting and ultimatum from the Ukraine government to pro-Russian separatists to lay down arms.
Naturally this has caused many to feel the prospect of a Russian-backed civil war is closer, and the comment from the Polish prime minister over the weekend ‘that over the past few hours we've witnessed the worst-case scenario playing out in Ukraine’ has been noted. The French Ambassador to the UN detailed that he had grave concerns that Russia’s recent invasion of Crimea may be ‘recreated’ in Eastern Ukraine; a statement which most in the market won’t be overly surprised about. The deadline imposed on the separatists is 15:00 AEST, so we will have to see how the market reacts after that, but of course a lot depends on the subsequent moves from Russia and what (if any reaction) there will be from the west.
Gold seeing good buying in Asia
Gold and brent have naturally benefited from this, with the precious metal hitting a high of $1329; it has traded through the 38.2% retracement of the 8.2% fall during March to April at $1321. A daily close above this retracement could see $1348 come into play. There’s also been a further bid in US treasuries, with the ten-year trading down two basis points to 2.60% and it is now eyeing the February low (and bottom of the recent range) of 2.56%.
The USD has found only very modest love in the market, although saw a reasonable move against the EUR, with EUR/USD initially falling fifty pips to 1.3834. The ECB has clearly helped here, and while the ECB president Mario Draghi and ECB member Benoit Coeure have spoken out again that the exchange rate does affect its monetary policy stance, most in the market have used this as a buying opportunity. The ECB is not going to ease anytime soon, especially with the flash CPI estimate (on April 30) expected to bounce somewhat, so these are relatively hollow words. Given the amount of criticism from the G20 aimed directly at the Europeans for being far too reactionary, there are some suggesting these are words designed to appease the collective. The governor of the Bank of France, Christian Noyer, speaks today, and if there is one person who has been more outspoken about his desire to see a lower EUR, its Mr Noyer. His comments will be EUR negative, but that won’t surprise, so the reaction in the EUR should be limited.
The ECB and the RBA would have been very displeased last week, with the massive re-pricing of Fed hike expectations. The RBA, along with other central banks need the Fed to act, and act soon. With AUD/USD at 94cents, the prospect of jawboning from the RBA is increasing. EUR/AUD is a really interesting pair right now, as both represent currencies where the central bank needs a weaker currency; however while we may see jawboning, the market is giving the narrative a wide birth. I would be a buyer of the pair on a trend break of 1.4810 (on the hourly chart) and of the two central banks I get the suspicion that the market will give more credibility to RBA jawboning than ECB jawboning if we get a good move lower in Aussie inflation next week.
Asian equities have been offered today, which won’t surprise. The ASX 200 saw losses accelerate into the afternoon, with healthcare, and discretionary names finding good selling activity, although the big points have been taken out by moves in the banks. It has to be said though that volume was poor and at 13:35 the market saw volumes 17% below Friday’s.
The financial sector is very interesting; having failed to close above the October high, it is looking like it wants to head lower. If you take Westpac we’ve seen a modest bias to be short today, with 55% of all open positions sold short.
Weekly chart of Nikkei looking fairly ugly
The Nikkei is the index which has been most talked about today, with the technicals now shaping up for a fairly scary move lower. Last week the index closed below the neckline of the multi-month head and shoulders pattern at 14,135. A rally and subsequent rejection of this former neckline would be the green light to short this index and the technical target is 11,500. Those who follow the ichimoku cloud would have seen a break of the weekly cloud and the downside target here is around 12,500. This is one to watch, but things could be about to get fairly ugly.
Europe looks set for a bleak open itself, and traders should be prepared for a risk-off move. Taking the FTSE as a proxy, 58% of open positions on this index from IG clients today have been on the short side; however we’ve seen better buying as we go into the afternoon. US futures have only had a modest move (currently down 0.2%), but there are signs the futures are ready to see a deeper pullback and a 5% correction can’t be ruled out from here. The market has a general malaise that it is ready to pullback somewhat, so as they say, keep your friends close and your stops closer. Earnings from Citigroup will be in focus today and the market expects adjusted EPS of $1.14, on revenue of $19.4 billion.