Asia week ahead: Are equities extending lower?

Ever since the UK voted to leave the European Union (EU) in a referendum, investors have been buying global equities, against what was expected. 

Trading
Source: Bloomberg

As a result, there has been a stock rally for the past two months or so.

One explanation for this uncharacteristic move was the dearth of suitable investments to consider. Worldwide interest rates were mostly low, with some even in the negative. So fixed income is not an attractive asset. Commodities still face a fair bit of pressure, with the oversupply and under-demand condition lingering in the background. Somehow, equities are viewed positively, despite weak corporate earnings, owing to a sluggish world economy.

Another explanation is the fact that the UK has not officially begun the process of leaving the EU by activating Article 50. Investors are hoping for a reversal of the referendum result, which is reflected in the recent stock rally.

But that stock rally appears to be faltering this week or so. A major reason is the increasingly hawkish view of the Fed, with vice chairperson, Stanley Fischer, leading the charge. Janet Yellen’s speech at the Jackson Hole symposium last Friday also smelt a tad hawkish. Expectations of a rate hike consequentially rose. Tonight’s payroll data will be watched like a hawk (no pun intended!), and the headline number would likely set the stage for next week’s trade. Specifically, the moves in the US session could be more volatile if the data deviates significantly from consensus, as there is a US market holiday next Monday.

The G20 summit held from 2nd to 5th September may shed light on how the world’s largest economies plan to do. The world economy is experiencing a slowdown, led by China. Global expansion in monetary policy is functioning as a backstop, but such easy policies cannot go on forever without support from the fiscal side. The implication of prolonged loose monetary stimulus is considerable distortions in the financial markets.

 

Central bank watch

Central bank activities would accompany the G20 developments. Bank of England Governor Mark Carney would testify before British lawmakers on 7 September, where details about the Bank’s measures following the Brexit vote may emerged. The members of Britain’s House of Commons will debate a petition calling for a second referendum on Brexit. Fed officials John Williams and Eric Rosengren will be speaking, while the Beige Book will be published mid-week. The European Central Bank (ECB) meets on 8 September to review monetary policy, while the Eurogroup will be meeting on 9 September, where they may discuss Italian banks, Brexit and the budget outlook.

In Asia Pacific, the Reserve Bank of Australia, Bank of Korea and Bank Negara Malaysia would decide on monetary policies. Bank of Japan Governor, Haruhiko Kuroda, will be speaking on Monday, 5 September.

On the data front, Australia will release Q2 GDP while Japan will update its Q2 GDP. China is to report August trade figures, inflation numbers and foreign direct investment data next week. In corporate news, Apple is holding a keynote event on 7 September where the iPhone 7 is likely to be announced.

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