Asian markets remain quiet

With China closed for the Labour Day holiday we haven’t been provided with Dalian iron ore futures or the daily RMB fix. Both inputs that have the ability to rock sentiment.

The ASX 200 is basically unchanged and while Macquarie was the latest financial institution to beat current earnings, it seems a lot of goodwill is in the price, with a soft dividend and forecast for 2015 earnings behind today’s falls. Still, this is a company that has a strong tendency to under-promise and over-deliver, so investors will be happy to pick this up at lower levels.

There were some excitable flows in Treasury Wine Estate (TWE) on talk that Pernod was sniffing around its US assets. This was later denied, although the market is still giving the speculation merit given CEO Michael Clarkes comments on March 31 that he is not emotionally attached to any part of the business and considering all options.

Elsewhere, Japan is down a touch, although continues to be held hostage by moves from the Fed and subsequently USD/JPY. USD/JPY is at a strange old juncture now and while Mr Kuroda and his BoJ colleagues are high fiving and celebrating their projected path of inflation over the next two years, the market is still unsure whether to share their optimism. Still, with the market having thoroughly priced in the current expansion of the monetary base, the downside in JPY seems limited. Traders can expect a range of 100 to 105 for USD/JPY over the coming months and like the ECB, RBNZ and RBA and to a lesser degree BoE, the BoJ really need the trend in US data to heading higher.

Volatility nowhere to be seen

It’s also interesting to see just how eerily quiet all asset classes are right now. This week, EUR/USD for example has traded in a 114 point range, which is a slight expansion from last week’s 70 points range, which in itself was the narrowest weekly range since the inception of the EUR in 1999. Last week USD/JPY had its narrowest range since January 2012, while GBP/USD since 1988. Cable clearly has seen range expansion this week and is bullish on pretty much any time frame; however this seems a fairly isolated case. The US 10-year treasury has traded in a 23 basis point range since the start of January – the tightest range over the time frame since 1978, while the S&P 500 can’t shake its 1840 to 1880 range.

It feels like something has to give and perhaps the spring has been pulled back too far, but what is likely to cause a sizeable pick-up in range expansion and volatility? A black swan could still cause it, but issues in China, Japan and Europe are widely known and not likely to cause a sizeable risk off move at this stage. Perhaps tensions in Ukraine could be the trigger, with news flow today taking a turn for the worse, centring on government military operations in Sloviansk. If history is to be our guide, these periods of ultra-low volatility (when seen in all asset classes) are usually a strong pre-cursor to a big pick up in volatility.

Europe re-opens today on a mixed note, with traders looking out for the European and UK manufacturing PMI, while Eurozone employment will also be in play, although will no doubt be a sideshow to the main game in town – The US payrolls report.

A really strange set-up for today’s US payrolls

Last month’s non-farm payrolls were a pure exercise in positioning for anyone who traded around or watched price action on the slightly below estimates jobs print. This month things look really interesting and while the consensus estimate of 218,000 jobs created in April stands as the highest consensus call since May 2010 and the usual lead indicators (such as the employment sub-component of the manufacturing ISM and ADP payrolls) have been elevated, market positioning seems much more sanguine this time around.

The USD has found no love of late, while price action in US treasuries is hardly thematic of a market overly concerned that a strong payrolls report will sharply alter the current investment landscape. Interestingly, if you look at USD/JPY overnight implied volatility (measuring the skew of USD/JPY calls to puts) we’ve seen some strong intra-day volatility suggesting the market is a little unsure how to trade the USD. One month volatility is going the opposite way and is now at the lowest level since June 2007.

It’s going to take more than one good payrolls report to change the trend in the USD and for that to occur the market needs to see this merging trend in better US data continue, resulting in increased inflation expectations, in turn causing the market to alter its view on when the Fed hikes the funds rate.

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