Japan leads a mixed trading day in Asia

Asian markets found modest buyers early on, feeding off the leads from Europe and the US, but then saw some bizarre price action around midday.

High frequency trading (HFT) is firmly in the spotlight right now; with the FBI investigating the advantage certain funds have over others. The issue has reverted to the logic used for systems which adopt positions purely on news flow. The fact that we saw CME copper spike today on news of the huge earthquake in Chile is understandable, given Chile accounts for 33% of global mined copper production, but why this put a bid in US futures, USD/JPY, EUR/USD, and AUD/USD is very strange.

Copper found sellers after spiking just over 1%, but came back fairly quickly and this should have been the cue for traders to sell into the other price moves in other assets. However, some traders have been quick to close out as we approach the open and it’s fair to say the reactions today will have done little to improve the image of the HFT space.

These are tough markets to short, with price action in European and US markets looking strong, and when looking at market psychology the fact that markets rallied yesterday despite mixed data was testament towards the search for good news. If sentiment is a key component in driving price around, I should think these markets can continue higher, especially because earnings season in the US starts next week and consensus earnings have been lowered of late. The traditional 70% beat/miss ratio for the S&P 500 companies looks ominously poised to be tested once again, and could be a backdrop for all-time or near all-time highs.

Moves in Asia

Japan has been the big mover in Asia today, as the Nikkei has naturally benefitted from the inflows into USD/JPY. However, I feel there must be more money managers positioning for an increase in the BoJ stimulatory efforts.

Yesterday’s TANKAN report highlighted a weaker outlook for both large and small companies across a range of industries, and this was then backed up today by another survey by the BoJ who asked a range of businesses on the expected levels of inflation in Japan over a one, three and five-year period. They asked the companies to exclude the tax rise effects from their inflation forecasts and the results were underwhelming.

The BoJ are looking for CPI to increase to 2% by 2015, so the fact that Japanese companies see inflation 50 basis points below this level is a concern, with expectations 30 basis points below over a three and five year period as well. Additional easing seems logical for June or July, although the BoJ will be hoping for a strong US non-farm payrolls on Friday to help push up USD/JPY and once again promote imported inflation. Still, USD/JPY looks strong and a close above 103.66 and 103.76 (the 61.8% retracement of the January to February sell-off and March 7 high) would suggest a test of the 105.45 high.

AUD/JPY also looks good for further appreciation and has recouped 50% of the 18% decline during 2013. The fundamentals continue to work well and this isn’t just a case of central bank policy divergence. Non-residents have started buying Australian debt again in size, notably the Japanese who bought just over A$5 billion of bonds in the four months to January. With Treasury issuing a record amount A$23 billion of net bond issuance in Q1, this demand should see the AUD supported.

The ASX has really struggled to make any traction today despite the moves in Asia (the CSI 300 has gained 0.5% at this stage) and offshore, and while we’ve seen gains in the materials space, the fact that banks have seen little upside is naturally holding the benchmark back.

Ahead of the European open

The positivity continues to Europe, with a strong open expected to be seen. Most of the market focus will be on the US, with the ADP private payrolls (expected to print 195,000), factory and mortgage applications in focus. The ADP payrolls report has been a poor predictor for the payrolls report, but it should help predict the direction and a good number should see the USD do nicely. Given the rebound expected in Fridays payrolls report, no one will want to left behind if it comes in above 200,000, so todays ADP report will set a precedent here. Fed members Dennis Lockhart and James Bullard will also speak.

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