Following the soft close for the US (S&P ?0.7%), Asian equities are trading lower across the board, with the Nikkei leading the moves (-5.15%). The recent volatility in UST?s and JGB?s is continuing to weigh on the markets.
With focus on fixed income, treasuries briefly opened cheaper in Tokyo as USDJPY squeezed through 101.50, however, the selloff in the Nikkei, which has taken out last week?s low at 13680, triggered an illiquid and choppy grab for duration in treasuries. The uptrade was led by TYM3, with reports of fast money short covering in the contract. Our flows were much lighter than yesterday with scattered buying from central banks and trading accounts in the belly.
This has seen the USD continue to trade softer across the board into Asia, with short term players continuing to be taken out of their USD longs. USDJPY has traded back below 100.60 on London open, not helped by the MoF weekly capital flows data showing another week of net foreign bond selling by Japanese investors (JPY1.1 tril, bringing total since week including early April BoJ meet to an INFLOW of 3.6 trillion). Would note however that although USDJPY is lower, we are surprised that it?s not sold off more given that the Nikkei is down over 5%. Perhaps USDJPY longs have been trimmed significantly. Our order board is much better balanced now with bids under 100.40/25.
The Australian CAPEX report revealed a 4.7% qoq decline Q1 with plant and machinery investment down 3.3% qoq. The second estimate of spending for the ?13/14 year was down 9.8% compared with the equivalent estimate in ?12/13, this was softer than the market expected but inline with our expectations. The softer number has been offset by a rise in building approvals at +9.1% (vs +4.0% expected) although this is a volatile series. Overall, Adam Boyton suspects that these data have done little to change the RBA’s view on the economy, and we continue to look for a further 25bp rate cut in Q3. The key out-take, for us, is that investment indeed appears to have contracted in Q1 GDP (due next Wednesday). Read the full report: Market Research
In terms of flow, we saw very heavy AUDUSD buying since Capex and Building approval numbers, with the softer USD across the board not helping the move. Would note that our order board is still looking dangerous with more stops lurking above 0.9700/20.
In New Zealand RBNZ Governor Wheeler delivered a speech in which he argued that the RBNZ will need to draw on all its policy instruments – including macro-prudential instruments – to achieve its price and financial stability objectives. As expected, a ?significantly overvalued? exchange rate and rising house prices came in for particular attention. Wheeler noted that the Bank is prepared to scale up its foreign exchange activities if it sees opportunities to have greater influence. RBNZ sold net NZ$256mn in April intervention.
Elsewhere, COPOM unanimously decided to raise the SELIC rate by 50bp to 8%. Surprise given last went 25bp and GDP was weaker during the day/Mantega’s comments on the currency did not seem to suggest that inflation was an overriding concern. Little reaction in USDBRL to the hike. Only 1/2 figure of highs at 2.1100. Market will now be watching to see if CB intervenes. Last time they did was on the other side of the market in March. Note that today is a holiday for local market. Suggests that we may have to wait for intervention, even if it is set to come.
Finally, choppy session in Asia with initial weakness was shrugged off and USD asia drifted lower inspite of heavy price action in equities. PHP was particularly erratic with spot trading to highs of 42.64 before much stronger GDP print resulted in long liquidation and spot dropped mere 1% very quickly. Month end flows keep upside in check for now but USD asia definitely feels supported and buying the dips seems prudent approach.
Looking at the day ahead we suspect government bond markets will continue to be the main focus for investors. Given the recent moves in Treasuries, upcoming US data points will clearly be closely followed as in the near term it may affect the speed and quantum of any Fed tapering. On that note, the second reading of the Q1 US GDP, initial jobless claims and pending home sales are the notable releases today. DB’s Joe LaVorgna is expecting today’s first set of revisions to Q1 GDP to show only a modest change to the composition of growth seen last quarter. As a result they are projecting only a slight downward revision in growth to 2.4% from its initial, above-trend print of 2.5%. Initial jobless claims are largely expected to hold steady at 340k while pending home sales are expected to show a strong year-over-year improvement. In Europe, we have the latest economic sentiment survey from the European Commission and French jobseeker data but the US economic/macro picture is the key at the moment.
Deutsche Bank