Volatility ramps up, but things look brighter

It seems traders were exposed to nearly all of the macro fears of 2016 in just one session and we have been left with a full risk-off trading session.

Source: Bloomberg

I have listed many of the issues below, and we should see Asia once again under pressure today, although things here in Australia don’t look comparatively bad. The open of the Chinese futures market and People’s Bank of China’s (PBoC) CNY ‘fixing’ mechanism both occur at 12:15 AEDT; in theory, this could be the catalyst for a leg lower in Asian markets. Aussie traders, get your lunch before midday!

  • Growth fears are back in focus and we‘ve only had one full trading session. We had it all. Poor Chinese Caixin PMI numbers, backed by another horrible US ISM manufacturing (48.2) and construction spending (-0.4%). US Q4 GDP is released on 30 January and we can’t rule out a print below 1%. The Atlanta Federal Reserve cut their running estimate for Q4 annualised growth last night to 0.7% (from 1.3%).
  • The US yield curve flattened to 120 basis points and is eyeing last year’s low point of 117bp. The word ‘recession’ is being used more and more.
  • Financial conditions have deteriorated marked by a 16% increase in the US volatility index (VIX). Watch implied volatility as the VIX is now 28% above the five-year average.
  • China’s equity markets were largely cited as a reason behind the strong moves in European and US markets, and there is little doubt the CSI 300 would have been down further if it weren’t for the 7% circuit breaker. I could name five different reasons behind the selling in Chinese equities, but I would say that the article in the People’s Daily publication stating ‘traditional Keynes theory has its limits’ can’t be seen as a positive and they are clearly arguing for structural reform. Perhaps the writer of the article could have portrayed this to the Japanese 20 years ago! There was also a strong focus in the article on overcapacity, lowering costs and removing ‘zombie’ companies.
  • China’s continued devaluation of the yuan (CNY) is clearly hurting sentiment towards China’s export competitors. In terms of export volumes, if China is becoming more competitive, the rest of the world is losing out. Watch today’s CNY ‘fixing’ at 12:15 AEDT.
  • There has been some focus on Japan with the Nikkei publication talking about the possibility that the Bank of Japan (BoJ) will cut its inflation forecast. As day passes night, I find further evidence that Japan will be a prime candidate for a major collapse in global markets in late 2016, early 2017. I struggle to see how QQE will end well. The Nikkei should open on another heavy tone this morning.
  • Copper fell heavily during the Asian trade yesterday, but is a further 1.1% lower from yesterday’s ASX cash close.
  • Gold rallied to $1083 but has since seen selling and failed to close above the November downtrend. I would be a buyer on a close above this trend (currently $1076) for $1110.
  • Middle East tensions are fully in the market sights. Oil rallied to $38.39 but the US poor data saw a 5% collapse in the price. There seems little doubt if you are trading oil you would be fully aware that the commodity can move significantly at a moment’s notice. Oil is for the brave.
  • In the FX space the JPY has shown again it is the number one safe haven currency in times of stress. NZD/JPY fell 3% and all eyes are on huge bids into ¥80.00. USD/JPY has rallied strongly from the overnight low of ¥118.70 and I would be selling into ¥120.00, although it’s tough to be short the USD with Friday’s US payrolls in focus.

All-in-all we are calling for the ASX to open at 5260 – a fall of 0.2%. This seems remarkable given the comparative moves. One even suspects we may see some buying in the banks despite the sharp pick up in volatility and the unwinding of income structures in markets.

Will today turn around? Perhaps traders got out of the wrong side of the bed yesterday? Today promises to hold a number of answers and we’ve already seen a recovery in our European equity opening calls. I am keen to watch USD/JPY and whether it can push back into the ¥120 region as this FX pair, along with moves in Chinese assets which could set the tone in Asia today.

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