The perceived calm in financial markets yesterday led many to believe investors were picking up the pieces from an early year exodus in risk-correlated assets; however, that semblance of stability evaporated into the afternoon session with oil and North American equities collapsing in tandem to finish off the trading day. The pessimistic mode filtered through to the overnight Asian session, where the Shanghai Composite dumped 6.4%, while the Nikkei shed 2.4%. The offshore Chinese yuan continued to ebb lower against the USD overnight, despite a relatively stable fix for the onshore CNY, though the People’s Bank of China did continue with its campaign of making sure liquidity is ample throughout the upcoming Chinese New Year period, injecting 440bln CNY worth of reverse repos into the market.
Comments from an ex-Bank of Japan deputy were unable to put a bid tone under domestic equities during the Asian session, even though the individual highlighted this week’s monetary policy meeting could see the BoJ ease policy further. While we have seen comments from policy makers in Japan recently that have raised concern in regards to the strong performance of the JPY to begin the New Year, and economic data points have been lacklustre, we are less sanguine a further adjustment to monetary policy will materialize at this week’s meeting. Though Governor Kuroda has been known to aim to surprise market participants when instituting policy changes, comments from the Governor at the end of last week that market turbulence hasn’t impacted corporate behaviour suggests there is little concern at the moment with subdued economic performance. As we mentioned before, with trend growth in the Japanese economy running at ~0.5% (compared to the United States at ~2.0%), the possibility of a slight contraction in the fourth quarter is not necessarily worrisome for policymakers. The bigger picture for the BoJ will be the release of inflation forecasts, and if there are any downward adjustments to 2016 and 2017 that reflect a delay in reaching the central bank’s target. If the Bank of Japan decides to leave its asset purchase program unchanged but downgrades its inflation forecasts by a material amount, this will likely fan speculation that further adjustments to policy are likely to be expected in the first half of 2016. The yen had been makings strides against the USD earlier this morning, but has now seen that earlier strength reversed and is gyrating right around the unchanged level as we go to pixels.
Heading into the North American open, equity futures are clawing back some of their overnight losses to pivot around the unchanged mark. The hydrocarbon market has found a modicum of support on comments from the Iraqi oil minister saying Iraq would be willing to cut output if others would agree to it as well. Given the underlying dynamics of the OPEC cartel these comments are largely puffery unless there is input to the affirmative from the Riyadh, and we wouldn’t expect them to gain traction unless that materializes. The loonie has managed to reverse some of yesterday’s weakness on the back of firmer oil prices, and will likely see this correlation (along with that of equities as barometer of risk appetite) hold tight until the domestic GDP data release on Friday. Today during the North American session we will see the release of Consumer Confidence as surveyed from the Conference Board, but other than a likely knee jerk reaction to the print at 10:00EST, the bigger focus for market participants will be tomorrow’s rate statement from the FOMC.
Further reading:
EUR: Parity By Mid-2016: JPY: Looking To Renew Shorts – Nomura
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