Relief rally for Asia

Asia is finally seeing some gains today, with the exception of Japan, which is playing catch-up as it was closed yesterday.

Source: Bloomberg

While sentiment was subdued in the US as losses accelerated towards the end of the session, it seems investors aren’t completely convinced there was enough ‘bad news’ to warrant the sharp sell-off. The losses were mainly blamed on airline stock weaknesses after an Ebola scare and a drop in Brent Crude prices hurt energy plays.

However, with US earnings set to come in thick and fast and no real conviction to buy the dips in equities, there was just nothing to support the price action – resulting in the breach key technical levels and the 200-day moving average. Additionally, Columbus Day in the US kept volume relatively low and exaggerated the downward move.

It certainly feels like make-or-break week for the US, with around 53 S&P 500 firms reporting Q3 earnings this week, starting today. JP Morgan, Johnson & Johnson, Wells Fargo and Citigroup report before market, while Intel reports after.

This will help give a better indication of growth from an earnings perspective and will set up expectations for the rest of the earnings season. Given the momentum we’ve been seeing in US economic data, there is a good chance earnings will get off to a strong start. It’ll be all about whether earnings can match momentum from the economic data and how confident companies are with forecasts.

Japan recovers from lows

The Nikkei has lagged the region today but is significantly off its lows, helped by a USD/JPYrecovery. There is growing talk around global growth concerns reducing the Fed’s desire to start tightening around the middle of next year. While growth has certainly been an issue of late, I feel this is exaggerated and investors will just have to continue monitoring data to get an accurate indication of when we should expect rates lift-off.

USD/JPY finally managed to find some support after having traded through ¥110.00 on 1 October and dipped below ¥107.00 yesterday. Interestingly, USD/JPY bottomed at the 61.8% retracement of the August-to-October rally, which comes in at ¥106.80. This has sparked a bit of a recovery in Asia and the pair is trading back above the ¥107.00 level. Japan’s Nikkei has been supported by this move and has nearly halved its earlier losses.

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Miners lead the ASX 200 higher

The local market is enjoying a relief rally today, with the underperforming miners finally enjoying a day in the sun. A jump in iron ore prices sparked a round of short covering for the beaten-down iron ore plays. Predictably, pure plays are the ones with the most gains as AGO and MGX posted double-digit gains, while FMG jumped around 9%. Investors will now be wondering if this is the beginning of a sustained near-term recovery and whether it will be enough to spark some bargain hunting in the near future.

Iron ore futures have managed to maintain the momentum in Asian trade – a positive for the iron ore miners in the near term. There has been plenty of talk around supply being depleted following some plant closures and perhaps this will lead to further gains. However, given the recent choppy trade we’ve been seeing, we are just as likely to open with red on the screens again tomorrow as traders sell into strength.

The recovery in risk sentiment and the firmer iron ore price has also helped underpin the AUD through Asia. AUD/USD has largely ignored NAB business confidence, which came off quite notably from the previous month, and has managed to squeeze higher to the $0.8800 region. Following recent volatility, I wouldn’t be surprised to see consolidation for the pair around this region.

Weaker start for Europe

We’re currently calling the major European bourses modestly weaker after having performed reasonably well yesterday. On the calendar we have CPI readings for the UK, France, Spain and Italy, along with the German ZEW economic sentiment. Given ECB President Mario Draghi’s emphasis on price stability, the CPI readings always carry a bit of weight. Disappointing figures could see the EUR/USD sell-off resume after having recovered over the past couple of days.

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