A spike in peripheral bond yields yesterday saw European equities slump and put a dent in risk sentiment. Emerging markets have not taken too kindly to the recent spike in yields and this is threatening to derail the recent recovery.
Japan’s Nikkei has actually been the worst performer in the region as the flight to safety benefits the yen. USD/JPY printed a low of 101.32, and while the pair traded below the key 101.50 level, it hasn’t closed below it and that will be the key for the rest of the session. This 101.50 level has held since February and a break would open the pair up to a potential move down to 100 again. Unless this level holds and we see a bit of a recovery, the Nikkei could be in for a rough patch heading into next week. Looking at the rest of the region, China and Australia are also struggling with materials being the biggest drag.
NDA victory looks certain
India is an outperformer today with a hefty gain, with initial vote counting showing the National Democratic Alliance (NDA) is in the lead. The market deems this as the most favourable outcome and the more seats the NDA secures, the more likely Indian equities are to extend gains. Looking ahead to European trade, the major bourses are pointing towards mild gains at the open after having been hammered yesterday. The periphery is facing a bit of a stronger open than the DAX as those markets had experienced significantly more selling yesterday.
The bond market seems key for all markets right now and focus will be pinned on yields in tonight’s session. While the market is expecting stimulus in June, the fact that Germany continues to outperform its counterparts on the data front makes the situation a bit tricky. In theory, this makes any action by the ECB a bit more complicated to implement and analysts are increasingly divided on what form stimulus would take. Regardless, the euro’s resolve is likely to continue being tested in coming weeks with potential for further downside. Data out of Europe is limited with trade balance being the most noteworthy release. Meanwhile in the US, we have Fed member James Bullard speaking, along with some housing data set to be released.
Resources facing a tough test
Despite all the noise through the week, the ASX 200 has actually managed to edge higher and looks like it will finish the week off with a modest gain. Of course this is mainly thanks to the banks which continue to extend gains and defy valuations time and time again. A concern in coming weeks will remain the resource space, where the challenges just continue to mount. Iron ore names in particular will be key for how this market trades and any sign that China concerns are easing should encourage a recovery. The pure plays in particular have been hammered this week and at some stage, investors will have to see some value in them.