Short-term volatility has come alive today

Short-term volatility has come alive today, with investors hedging and adopting a ‘return of equity’ mentality.

ASX 200
Source: Bloomberg

Volumes in the ASX 200 (at 14:30 AEST) were 27% above the 10-day average, while in Japan the Nikkei has been smashed with volumes 45% above the average. Both markets have seen liquidations, with traders clearly eager to close ahead of what could be an eventful weekend with potential gapping risk on Monday. Another bid has been seen in the US ten-year, which at 2.37% is telling a story in itself.

Gold has also found a bid as you’d expect, and should stay firm into London trade, while US futures have been offered all day.

The news flow during Asia has been fluid, and while traders came in having to get to grips with the ECB decision and further build-up of tension between Russia, Ukraine and the West, Asia has its fair share of drama and markets have taken a second leg lower.

Clearly the main driver was President Obama announcing that the US would initiate airstrikes against ISIS in Iraq. The moment this was announced saw S&P futures take a dive. The upcoming US cash session therefore could be very interesting as moves below the 100-day moving average (now 1913) have been the key area to for traders to ‘buy the dip’. I would personally hold off from accumulating just yet until clarity is restored, although those who subscribe to the mantra ‘buy when fear is high’ would look at this market with great interest.

Adding to the tensions we saw the Israel Defence Force (IDF) claim two rockets were fired from Hamas forces in Gaza.

The RBA released its Statement on Monetary Policy (SoMP) which saw sellers move back into the AUD, with AUD/USD hitting a low of 0.9240. The RBA lowered its forecasts for forward GDP and CPI assumptions and on current projections we have to feel that if the RBA is going to go one way now, it’s lower. Still for me the central bank is on hold for the year, and in fitting with the trend in the central banking world, it will provide a signal to guide the market and it is notable that this will involve changing the last paragraph in its rates statement. The swaps market is now pricing in 15 basis points of cuts over the coming 12 months.

China is bucking the trend, as it usually does on days of heightened volatility. Firstly the PBOC lowered its daily currency fix by a massive 108 basis points. Using the RMB as a policy tool is always an advantage in times like this, but then when you see its exports gaining 14.5%, some 6.5 percentage points above expectations, you have to query why it needed to lower the CNY (yuan) in the first place. Imports fell 1.6%, which took the surplus of $47.3 billion, which is a record for the tiger economy. The China CSI 300 is actually up on the day, and despite the usual scepticism around the figures, it seems to have stabilised the selling in Asia.

Japan released its June balance of payments, printing a non-adjusted deficit of Y399 billion. This was the first deficit in five months, however if you adjust the figure for seasonal factors then a surplus of Y125 billion was seen. There was a slight increase in the pace of exports, although with the JPY pulling back below the 102 level, if the geo-political tensions persist and even deteriorate we could see inflows into the JPY pick up some steam, which could bring the BoJ back into the ‘jawboning game’. The key here though is USD/JPY is moving tick for tick with the US ten-year treasury and as long as the ten-year moves towards the 2% level, USD/JPY will head lower. We also saw the BoJ report its monthly monetary policy meeting, with the central bank becoming modestly more dovish. This is consistent with my view that moves below 100 on USD/JPY will see a significant ramp up in expectations around an increase in its asset purchase program.

European markets will continue to find heavy selling on the open, with client’s heavy sellers of out-of-hours indices and trading with the underlying trend. Take the Italian MIB for example: 79% of all open positions today from clients have been sold short; on the German DAX this figure stands at 62% and FTSE 100 at 67%. It seems only a short time ago that traders were talking corrections, but now it seems only a matter of time before we see technical bear markets (moves of 20%+) in certain European markets.

European bonds are likely to find further bids, with much focus on the fact that investors are paying the German treasury to hold their funds for two years (return of capital). It’s Interesting as well to see that German bund yields are under 25bp out to the five year maturity. Recall the ECB will be providing liquidity to European banks at 25bp for four years, so the ECB has effectively engineered lower rates. 

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