Risk Appetite Struggles
Risk was broadly soft during overnight trading, though FX markets generally held Asia session ranges. Growth-sensitive Asian markets were heavily hit by the poor run of data in recent days, especially the weaker jobs numbers out of the US on Friday. The Nikkei 225 ended the session down 1.70% and other high-beta indices such as China, Korea and Taiwan fared even worse – Shanghai and Taipei’s both suffered their worst daily performance in six months and this would likely only add to fears of capital flight. European bourses fared better, however, with Spanish and Italian indices turning positive, likely on the hope that a pan-European resolution to the banking sector, in particular a roadmap towards a banking union, would emerge in the coming weeks. Friday’s US numbers have started to fuel expectations of fresh quantitative easing by the Fed, especially given their window for action appears narrower this year. Perhaps the most telling barometer was the rally in gold, though we note that this was exacerbated by the high degree of short positioning. Price action aside, we note that policymakers are usually reluctant to act on the back of one-month’s worth of data, and for the US in particular, the Fed would point to external headwinds which are beyond their control. Fed’s Pianalto said shortly after the jobs report that the weak numbers alone were not enough to change her outlook on the US economy, and at this stage there still doesn’t appear to be a stronger case for more accommodation. USDJPY was also volatile on Friday, as the initial post-payrolls slump gave way to a sharp bounce on market speculation of FX intervention by the Japanese authorities. There was no confirmation by Japan’s MoF, with Vice Finance Minister Nakao simply issuing a “no comment”. Finance Minister Azumi maintained radio silence on the intervention front in comments overnight, despite warning ‘decisive action’ would be taken last week. More nervous trading can be expected ahead this week, with the spotlight on the upcoming BoE, BoC, RBA and ECB meetings, not to mention Bernanke’s testimony before the Joint Economic Committee. The UK remains closed today and tomorrow for Bank Holidays. Overnight EURUSD traded 1.2387-1.2442 and USDJPY 77.99 -78.27.
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UBS Investment Bank