Ahead of the European open

It has been a lacklustre session in Asia today, with most markets opening lower and staying that way as investors remain in ‘wait and see’ mode on the Syria issue.

With the Republicans seemingly willing to play ball with President Obama on a Syria strike, the thought of war is becoming a reality for some investors. Positive data from the US also proved to be a bit of a negative for equities, as talk of September tapering ramped up again. US ISM manufacturing PMI came in at 55.7 (versus expectations of 54.2) and reinforced the idea that the US economic recovery is on track for September tapering.

After a very strong performance yesterday, the Nikkei has struggled today with a 0.6% fall as USD/JPY remains sidelined and traders weigh the potential impact of the sales tax hike. Finance Minister Aso confirmed that Japan is going to proceed with a planned two-stage sales tax hike, but it may be countered by an extra budget for fiscal spending. Mr Aso will announce the tax hike at the G20 nations summit this weekend. 

Japan is looking to increase its sales tax from 5% to 8% and then to 10% as the country looks to repair its balance sheet. While this is nothing new, the timing is interesting as it has been changed from an April 2014 implementation to October this year. While the sales tax hike threatens to derail the recovery, the fact that Japan’s leaders are looking to counter the impact suggests that they are on top of the situation and we should hear more about how they plan to do so over the next week or so. This could even mean further stimulus might be on the way. Looking at the rest of the region, the ASX 200 is 0.6% lower, the Hang Seng is down 0.4% and the Shanghai Composite has shed 0.1%.

The main theme in the FX space has been a resilient AUD on the back of some encouraging GDP numbers. The AUD has gone from strength to strength this week, with an initial lift from China and European manufacturing PMI data. Yesterday’s rate decision was largely expected, but analysts and traders have focused on the deletion of the room for more easing reference. The RBA also stuck by its forecast for a pickup in global growth next year and feels the current rate setting is appropriate.

This has seen the AUD as the best performing G10 currency against the greenback, with AUD/USD now looking to establish itself above the 0.90 level. Australia’s 2Q GDP showed a 0.6% rise on quarter (versus expectations of 0.5%) and this has seen AUD/USD extend its gains in Asia. This implies a 2.6% run rate year-on-year and this is above the RBA’s projected run rate of 2.5%. 

The pair has advanced to a high of 0.9105 and has rallied significantly against most of the major currencies. In the absence of any surprises from the Syria front, we could see the pair test resistance in the 0.925 region in the near term. AUD strength has also seen the uptrend in EUR/AUD broken after having been in place since April. A close below 1.445 would mount bearishness on the pair.

As it stands, European markets are pointing to a modestly firmer start after having struggled yesterday.  With sentiment not deteriorating further in Asian trade, it looks like we might get some stability at the open today. EUR/USD has remained subdued and sidelined at 1.316 as we approach the business end of the week on the data front, with the ECB due out tomorrow. Later today we have Spanish, Italian and European services PMIs due out along with retail sales and revised GDP. We also have services PMI due out of the UK and expectations will be high following the recent positive run of data. 

Over in the US we have trade balance and the Beige Book to look out for. While markets look stable at the moment, any further signs that the US is ready to move on Syria will probably send investors back towards safe haven assets and out of risk.

The local market is down 0.6% at 5,165 with a cautious tone all round. After having just poked its head above 5,200 yesterday, a pullback is not too surprising as investors struggle to hold their nerves as we approach the year’s highs. We managed to find support in the 5,150 region which has been a significant point of consolidation for the local market this year. The only few bright spots in the market today are gold names with Newcrest Mining rising 1.6% and Regis Resources surging 3.1%. With the federal election now 3 days away, the market is looking for any form of a bright light as a report from Goldman Sachs showed that every time the ASX outperforms the DOW by 6% or more in one month it underperforms the index by 4.3% in the following month.

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