Jamie McGeever
(Reuters) – The outlook for Asian markets for the day ahead.
A week is not just a long time in politics.
Seven days ago, a sharp unwinding of yen carry trades and a sell-off in large U.S. technology stocks triggered a wave of volatility that roiled global markets and sent investors rushing to U.S. Treasuries for safety.
As a new trading week begins in Asia on Monday, it seems like a long time ago – many assets have recouped most of their losses, volatility has subsided and traders have sharply reduced rate cut expectations.
The question now is whether this momentum can be sustained. Some investors will take advantage of the drop in stock market volatility to push risk assets higher again; others will be wary of possible aftershocks in any corner of the market, especially in mid-August when there is much less liquidity than usual.
The Asian calendar is light on Monday. Indian consumer price inflation is the main event, leaving the market at the mercy of global forces.
If that’s the case, Monday should be relatively quiet. Wall Street’s gains on Friday meant the Nasdaq was essentially unchanged from last week’s close. U.S. Treasury yields fell on Friday but notched their biggest weekly gain in months.
Stronger-than-expected U.S. economic data suggested fears of a recession were exaggerated, while several U.S. debt auctions were poorly received, pushing yields higher. If you thought last week’s plunge was too steep, maybe that’s not such a bad thing.
Asian markets’ rebound last week was quite impressive. The index fell just 2.5% for the week after posting its second-biggest drop ever and third-biggest 24-hour gain.
Other benchmarks performed even better – both ended flat and the MSCI Emerging Markets index rose 0.2%.
On the currency front, U.S. futures market data on Friday showed that hedge funds reduced their net short positions in the yen by 62,000 contracts in the week ended August 6. It was the largest weekly swing in the yen bullishness since the Fukushima disaster in February 2011 and the third largest since comparable data began in 1986.
If this is representative of the broader foreign exchange market, the “carry trade” of shorting the yen has been largely eliminated. Will traders start shorting the yen and engaging in carry trades again?
Indian inflation was the main data point in Asia after the Reserve Bank of India kept key interest rates unchanged at 6.50% last week, brushing off market turmoil and focusing on its medium-term target of lowering inflation to 4%.
The consensus in the Reuters poll is that annual consumer inflation will fall to 3.65% in July from 5.08% in June. This would be the first time in five years that the reading is below the RBI’s medium-term target.
Here are the key developments Monday that could provide more direction for Asian markets:
– Indian interest rate decision
– Indian Industrial Production (June)
– German wholesale inflation (July)
