However, the recovery seen in US markets off the lows has played a key role in Asia and seen some markets manage to come off their lows. It was a very confusing session as equities unwound significantly, yet it was still not an all-out risk-off session.
Perhaps what caught my eye the most were the moves in the bond markets, which were well bid and yields traded in fairly wide ranges. For example the 10-year traded between a yield of 2.23% and 1.86% before eventually settling at 2.14%. The fall in yields has continued in Asia with the yield on the 10-year drifting to around 2.10%.
There were a number of factors that investors had to contend with including geopolitical risk, Ebola and some US economic data which fell short of expectations. However, the Beige Book gave markets a lift as it showed economic conditions remain positive with all 12 districts describing growth as modest to moderate. As global growth concerns press on, investors will continue to question the probability of the Fed hiking rates in mid-2015.
While concerns have certainly ramped up in the near term, I feel this is a tad overdone and we’ll have to see some sort of normalisation in the near term. Focus now switches to speeches by Mr Lochart, Mr Plosser, Mr Kocherlakota and Mr Bullard with a high risk of commentary skewed to the dovish side. This could see yields continue to unravel.
Japan hits correction territory
The current volatility has turned Asia into a pure reaction time zone, with traders merely reacting to overnight moves. We’ve been seeing two-way business with an even split between longs and shorts suggesting there is limited real activity taking place. Major currency pairs are essentially unchanged from where they were at the end of US trade and this shows the level of uncertainty among traders at the moment.
USD/JPY has barely recovered from its overnight slide and this has also resulted in the Nikkei being one of the worst performers. Japan’s Nikkei has also dropped into correction territory and is now down 10% from its recent high of 16,374.
China outperforms on data
While most of the region is struggling, China is actually outperforming and is now in positive territory for the day. There has been a raft of economic data out of China, including foreign direct investment (FDI) which bounced back strongly and came well ahead of expectations. The FDI reading showed a 1.9% rise in September, its first positive print since June and this was complemented well by a pick-up in new loans and money supply (M2). While there are still concerns about a drop-off in China economic data, this is likely to encourage investors as it will eventually reflect in different measures of the economy. Additionally it shows officials are taking some steps to turn things around.
Yield plays lead ASX recovery
The ASX 200 is well off its lows and I feel this is to do with yields more than anything else. Recall the violent sell-off in the banks and other yield plays like Telstra was mainly driven by a switch in sentiment as US yields started rising again. However, with the recent moves in yields, and the 10-year trading below 2% for the first time, one wonders whether this trade will start to see some legs again.
However, a day barely makes a trend and we would have to see a sustained period of low yields before real money declares the yield trade as being back on the cards. Most of the banks are now relatively flat after having started the session significantly weaker. However, for the materials it’s been a tough day as growth concerns continue to hit the sector hard.
Europe to open firmer
Ahead of European trade, we are calling the major bourses mildly firmer with a bit of a recovery after yesterday’s sharp sell-off. After a long period of underperformance, the euro finally managed to regain some ground against the greenback. While it is tempting to say the euro strengthened, I feel it was more a factor of US dollar weakness supporting some of the risk currency pairs.
On the euro side, it was all about Mario Draghi as he spoke in Frankfurt and said he expects the recovery to resume, despite reinforcing downside risks to the economy. Draghi also said the ECB stands ready to take additional action if needed but this is nothing new.
Overall, EUR/USD spiked to a high of $1.2887, coming within touching distance of the $1.2900 handle. However, the rally seems to have stalled and the question now is whether yesterday’s burst is a selling opportunity. I feel any moves back towards the $1.2900 handle could be used as an opportunity to sell in the near term. On the calendar traders will be keeping an eye on the final CPI readings out of the region and a speech by German Buba president Mr Weidmann in Frankfurt.