Flat open expected for Europe

Asian equities are mostly weaker in the absence of event risk drivers, as investors weigh the possibility of September tapering.

As a result there is consolidation in most Asian bourses apart from Japan’s Nikkei, which has declined 1.6% today. There has been some volatility in the yen today and USD/JPY has lost its grip on the 98 handle, dropping to a low of 97.59 in Asia. Japan’s Finance Minister Taro Aso was on the wires saying Japan’s second quarter GDP data aids the case for a sales tax hike, and also quashed talk of a lowering of the corporate tax rate to counter the sales tax hike. This pushed the yen higher and in turn weighed on Japanese equities.

Talk of a cut to the corporate tax rate reported in the Nikkei newspaper had supported Japanese equities over the past few sessions and therefor this piece of news came as a blow. Looking at the rest of the region, the Hang Seng returned to trade today and is relatively flat, while the ASX 200 is down 0.2% and the Shanghai Composite is 0.1% lower.

EUR/USD and AUD/USD also experienced some volatility and managed to push higher supported by a strong performance in the commodity space. The single currency spiked to $1.331 versus the greenback, while AUD/USD pushed to 0.918. Perhaps weekly fund flows data showing a strong jump in Japan buying foreign bonds (¥1614.8 billion from ¥690.3 billion) is helping to support the euro and the AUD. The data showed Japan bought the highest number of foreign bonds since August 2010. Despite all the tapering talk, the US dollar has actually lost some ground in Asia, with the dollar index falling to 81.53.

There is quite a data dump out of the US later today and we feel there is some cautiousness on the USD front. The Fed’s James Bullard was on the wires reinforcing that any QE tapering moves will be data dependant, which really shows some consistency to what we’ve been hearing from Fed members lately. This just puts a bit more weight on CPI, unemployment claims and industrial production data due out later today. Mr Bullard will be on the wires yet again today, but we don’t expect anything new from him. The Empire State manufacturing index and the Philly Fed manufacturing index will also deserve some attention and will give an indication of how the US recovery is going.

Despite all the moves we are seeing in FX markets, we are still calling European markets relatively flat at the open today. The FTSE will be the interesting one to watch after underperforming the region yesterday as the BoE seemingly took a hawkish turn and after a sharper-than-expected drop in the claimant count change. An 8-1 vote to give forward guidance and a unanimous decision to leave interest rates and QE unchanged also supported cable.

This pushed the pound higher and weighed on the FTSE. The positive momentum from data showing the eurozone’s GDP returned to expansion could be short lived, particularly as investment remained weak. There is not much on the European calendar today and volume might be light as France and Italy observe Assumption Day.

The ASX 200 is treading water and is relatively flat at 5153, as today’s earnings fail to spark any real conviction. Some of the iron ore and gold miners are enjoying a day in the sun after gains for gold and iron ore overnight. BHP Billiton has climbed 0.8% and Newcrest Mining is up 2.3%. Smaller gold plays have rallied with Perseus Mining jumping 11% and Resolute surging 7.6%. In the financials space, Commonwealth Bank is up mildly, National Bank has tacked on 0.6% and AMP Limited has surged 3.6% after posting earnings ahead of estimates. Staying on the reporting front, Wesfarmers is 1.2% weaker despite declaring a special dividend and rising profit. Tomorrow is relatively quiet on the reporting front, with Santos being the only notable name reporting.

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