Asia struggles after poor US leads

Asian stocks have given up some of yesterday’s gains with the excitement from China’s stimulus actions swiftly waning.

Japan stock exchange
Source: Bloomberg

After a lacklustre US trade which saw equities mostly flat, Asia was always going to struggle for leads. Japan has been a standout with a recovery after having dropped significantly yesterday. The Nikkei is enjoying a modest rise despite choppy price action continuing in USD/JPY. Perhaps these gains are a factor of the growth strategies that the government is looking to introduce.

Japan is looking at corporate tax reform starting next year but is yet to detail the particulars. A growing concern at the moment is the fact that prices are rising sharply, mainly due to the consumption tax hike and other efforts to lift inflation. Meanwhile wage growth is still quite subdued, resulting in a widening gap and loss of confidence.

Data out of Japan this morning included a business survey index report which showed a sharp drop in sentiment while a corporate goods price index reading came in well ahead of estimates. This essentially confirms how the sharp rise in prices is hurting local sentiment. At some point Japan’s officials will have to deal with this issue.

The Nikkei has managed to hold on to its gains despite further signs of strain USD/JPY price action. The pair is retesting overnight lows and the losses could be extended if the 102.30 region fails to hold. Tomorrow will be the BoJ meeting which is largely expected to be a non-event.

Europe to open weaker

Looking ahead to European trade, the major bourses are facing a modestly weaker start. While the overall result yesterday was a generally flat performance, the price action was quite choppy, with equities under water for most of the session. The single currency finally yielded and lost further ground as the reality of the ECB’s stimulus measures sets in. This is actually a bit of a positive for Europe as the ECB had flagged the high exchange rate as a concern. There is a bit of activity on the UK economic calendar today with the claimant count change, unemployment rate and average earnings data set to be released. MPC member Broadbent will also be on the wires but I don’t expect this to have much of an impact on the sterling.

Euro finally losing its grip

EUR/USD looks like it is headed back to retest the lows it printed after the ECB announcement last week in the 1.3500 region. Yesterday I also highlighted an interesting trend developing in EUR/AUD based on diverging fundamentals. The pair broke the 1.4520 support I was watching and has since extended these losses to a low of 1.4409. A good bounce in the Westpac consumer sentiment reading was consistent with the RBA’s neutral bias and follows on from the NAB business confidence/conditions data from yesterday’s trade.

The market now looks ahead to tomorrow’s jobs numbers which have analysts quite split. The unemployment rate is mostly expected to remain steady at 5.8% with around 10,300 jobs added. A strong reading tomorrow could see EUR/AUD extend its losses and potentially head towards 1.4300.    

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