Ukraine concerns causing volatility in Europe

Asia has shown less caution to Ukraine concerns than Europe, with big volatility seen in DAX futures.

The market is still keen to watch developments here, with operations underway to regain Ukrainian facilities, with various sources suggesting that Russian Special Forces have been aiding the separatists. The interesting dynamic was a collapse in the gold price, but a heavy bid in German bunds, with the 10-year trading down to 1.47% and the lowest level since May 2013. Revisions to the March eurozone inflation print are due today, however it is unlikely to be revised from the prior print of 50 basis points. The eurozone CPI estimate is due on April 30 and that is where the real action could be seen, especially if we don’t see the sort of rebound the ECB expect.

USD/JPY breaks out above 102

If we look at USD/JPY, there has been a good bid coming back into the pair today, helped to a degree by comments yesterday from BoJ governor Kuroda that while he doesn’t feel the need to act now, he would not hesitate if needed. It’s always an element of chicken and egg type relationship between USD/JPY and Nikkei and which asset class drives which, but the fact that USD/JPY really started finding buyers when the Japanese equity market opened and shot up suggests the USD/JPY move was equity and futures driven. It’s also interesting that traders are happy to buy USDs ahead of Janet Yellen’s speech at 2:25am (AEST), given the Fed chair has been fairly dovish in her pursuit of pushing back on Fed rate hike expectations.

Comments from Japanese Finance minister Taro Aso today could certainly be helping here, when he spoke about the massive Government Pension Fund (GPIF) and the potential for portfolio rebalancing in June. This could invariably involve buying foreign assets (potential JPY weakens), while they could also increase it’s weighing on holding around domestic equities.

China was in play yesterday, with a slowdown in M2 money supply and further proof that the build-up in its foreign exchange reserves has highlighted the intervention in USD/CNY by the PBOC over the quarter. Given about 60% to 65% of China’s foreign exchange reserves are in USDs, the natural process has been to ‘recycle’ these holdings into other currencies. This has meant buying EUR/USD, GBP/USD and AUD/USD, which of course has contributed to the recent strength.

Chinese equities seeing better days

Today the Chinese market is seeing better days, after struggling on yesterday’s finance data, massive liquidity drain and higher CNY fix. The CSI 300 is up 0.5%, although it’s hard to fully attribute this down to today’s data dump. Naturally the Q1 GDP is the one everyone is quoting and at 7.4%, it was 10 basis points better than consensus. It is still a 30 basis point decline from Q4.

The seasonally adjusted (annualised) quarter-on-quarter growth print has slowed to 5.7%, which is hardly inspiring. The more frequent monthly data points (fixed asset investment, industrial production and retail sales), were mixed but on the whole improved and the focus now is firmly on Q2. Clearly the trend in growth is down, and there are risks we see 7.2% or so in Q1 and as the Labor minister said yesterday, below 7% and unemployment could move higher. The prospect of bad news being good news for stocks and bloc currencies is now firmly in play and there’s probably an element of that playing into today’s CSI move.

The ASX 200 found good buyers going into afternoon trade, with all sectors finding love. BHP produced a solid production report, but the gains in the stock seem to be driven by top down forces rather than a general good-will towards the report.

Moves in Japan and China have helped, but it’s interesting to see the 30-day correlation be the ASX 200 and both markets is still fairly low. On an index level the 50-day moving average at 5376 has supported of late, and for those who like really short-term moves 5445 (one standard deviation from this average) on the market looks achievable in the short-term.

The AUD has been all over the place today, however the trade has been to be long AUD/NZD. If New Zealand’s inflation numbers (+1.5% vs 1.7% eyed) are anything to go by then there could be modest downside risks to next week’s Australian Q1 CPI print, where the trimmed mean print is expected to tick up to 2.8% and testing the top of the RBA’s range.

US futures have moved modestly higher today as Japanese markets have found good buyers. It’s clear that the strong moves in the FTSE and DAX futures post market are going to have a strong bearing on the market open and it appears that despite an escalation of tensions in the Ukraine the market feels this could be a fairly contained issue, or at least that is what we are seeing on open. Where these markets close is a completely different issue though. There is something for everyone in the upcoming session, with European inflation, the Bank of Canada central bank meeting, US housing starts, building permits, industrial production and, in the UK, employment data.

We also get narrative from Fed members Janet Yellen, Stanley Fischer, Jeremy Stein and Dennis Lockhart. It’s a big day of earnings too, with Bank of America announcing pre-market, while Google, American Express and IBM announce shortly after the US close.

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