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The potential for an uneventful start to the trading week in financial markets has been thrown out the window; with global equities reeling after the Japanese economy entered the technical definition of a recession as third quarter GDP contracted by 1.6% on an annualized basis.   The fall of 0.4% on a q/o/q basis was strikingly worse than the 0.5% rise analysts’ had been expecting, sending the Nikkei cratering by 2.96% by the time the Asian trading session was complete.   Inventory adjustment was the biggest contributor to the Q3 GDP contraction, though private consumption only grew by a modest 0.4% from the previous quarter, illustrating the sales tax hike has elicited more of an impact on the domestic consumer than the government originally anticipated. Considering household consumption contributes 60% to Japanese GDP, the forward looking indicators don’t bode well to see a reversal and positive revisions to the disappointing growth numbers.   Sunday’s GDP numbers provide a solid rationale for the Bank of Japan’s acceleration in balance sheet expansion announced at the end of last month, though market participants remain skeptical of how well the BoJ’s asset purchase program is working to stimulate the economy.   The third quarter contraction and Japan’s triple-dip recession have boosted the likelihood Prime Minister Abe will delay next October’s planned sales tax hike, a move that will threaten the government’s work towards combatting disinflation, though will provide support to an already fragile domestic consumer.   The Japanese Yen whipsawed violently throughout the Asian trading session, initially taking USDJPY through the 117 handle before provoking a short-covering squeeze that drove the pair back into the mid-115s, where it managed to base with the pair recovering to now pivot in the low-116s just before the North American open.

Comments from policy makers and central bankers were the main focus early in Europe, where both the Euro and Pound have noticed a slight offer tone dominating order books this morning after participants honed in on dovish commentary from key figures at both central banks.   Playing off last week’s dovish quarterly inflation report, Mark Carney and the Bank of England’s chief economist highlighted the disinflation risks present in the economy, rationalizing the reasons for keeping loose monetary policy in place.   Across the pond it was Mersch from the Governing Council on the European Central Bank that added weight to the Euro, theoretically stating the ECB could purchase a wide range of assets that include EFTs and state bonds.   The Pound and Euro are both are shaky ground against the big dollar midway through the European session, with the currencies changing hands around the mid-1.56 level and the psychologically important 1.25 handle respectively.

Heading into the North American open, the economic calendar is sparse to begin the new trading week, though we did just receive September data on Canadian securities purchases.   The release illustrated that foreign investment in Canadian securities slowed to $4.4bn in September, with the majority of funds ending up in equities.   The slowdown from the investment of $10.3bn in August combined with sliding oil prices have put the Loonie on its back foot ahead of the opening bell, with USDCAD retracing some of Friday’s losses to try and retake the 1.13 handle to the topside.   US equity futures are off the overnight lows seen immediately after the Japanese GPD figures, but still having trouble making it back into positive territory as negative investor sentiment dominates prices action.   There is little in the way of tier-one economic data or events to come today, though capacity utilization and industrial production numbers due in a little under half an hour could provide knee-jerk market reactions if the numbers deviate materially from the median analyst forecasts.

Further reading:

Draghi repeats worries – EUR/USD pressured

Japan back in recession