Bleak day in Asia with bears firmly in control

It’s been another poor tape in Asia, with the Nikkei under pressure and the ASX 200 hitting a low of 5028. Volumes have also been sizeable.

The poor lead-in from the S&P 500 left a slightly bitter taste in trader’s mouths, after its mini tantrum as the chance of a December taper from the Fed moved closer to 50/50 after yesterday’s budget agreement. Bond yields in the US moved higher, partially as a result of the agreement, but also as a result of the ten-year treasury auction and thus fixed income traders will be keen to see the level of demand for tonight’s 30-year bond auction today. We also get US retail sales and weekly jobless claims, but with the Fed meeting this time next week, one would hope if they were going to announce a cut in the pace of its bond buying program they would have enough information by now to foster that view.

US futures under pressure in Asia

US futures saw good selling in mid-Asia trade and the cash market - if it were to open now -  would be testing near-term support at 1775. Yesterday’s tape and breadth (90% of stocks were lower on the day) were not good and a break of the 1770 to 1775 area would be well received by the bears. Reports that Stanley Fisher potentially being nominated for the Vice-chair of the Fed could be having an impact, given he has said before that he opposes adjusting the Fed’s forward guidance with regards to raising the threshold for putting up the funds rate.

The ASX 200 is down 1.2% and momentum seems to be accelerating to the downside. There really isn’t one major catalyst, but the selling has been broad-based, with energy, materials and industrials sectors all lower by over 1%. The banks have once again been at the heart of the rout, with rumours on the floors of a US bank putting through a sizeable sell order through the market. The index broke through the October 9 pivot low of 5118 yesterday, however on a number of technical measures the index now looks oversold and could see a bit of a bounce in the short-term.

The ASX looking oversold

It’s also interesting to see the number of stocks in the ASX 200 trading two standard deviations or more from its 21-day (short-term) moving average, which is now 20%. A week ago that figure stood at 1% - again, another good reading of how oversold the index is.

Aussie employment was both good and bad and thus we saw the AUD/USD react as such. On a pure headline basis the 21,000 jobs created was strong and nicely above consensus, with the mix of full-time and part-time enough to please those calling for future rate hikes. However, the market seems to have put more emphasis on the underlying unemployment rate, which ticked up ten basis points to 5.8% (as expected). While there was no change in the participation rate, the current rate of unemployment is at levels not seen since August 2009, while the employment to population rate (measuring employment as a percentage of the total population for all citizens over fifteen years of age) remained at a lowly 61.1.

Mix in the slowly worsening trend in employment and the prospect of a shocker of an announcement in next weeks ‘mini’ budget and you can see why the AUD has been offered through the day. The prospect that Treasurer Joe Hockey will revise his budget down markedly is real and there are some calling for a budget deficit of $50 billion (3.2% of GDP) in 2013-14. Importantly, the ratings agencies tend to look at other factors, like Commonwealth plus state gross debt, which is still low enough not to trouble these agencies. The ratings agencies will be keen to see what sort of plan the new government have in order to get back to surplus and it will be their subsequent views which bond and forex traders will be keen to see.

Heavy selling in Europe expected

European markets should find reasonable selling as they price in a US market that closed on its low.  Data looks fairly thin on the ground and will mostly centre in the US (as I mentioned earlier), although we do get European industrial production and French CPI. The European bond market could get extra attention today; given there will be comments from ECB member Peter Praet who has been suggesting banks hold increased capital against different sovereign bonds, with the idea to lower the reliance banks have on ECB funds in the future to buy sovereign debt.

This has implications of future funding sources for certain sovereigns, however banks have been keen to repay previously borrowed ECB funds. It also means the prospects of a new round of liquidity (LTRO) is low, unless it is used in a similar function as the UK’s Funding for Lending scheme, and also throws up the prospect that the EUR will stay nicely supported above 1.3500 until after the October 2014 asset quality review (AQR).

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