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Volatile trading and the policymakers’ dilemma

Asia Pacific investors face a challenging trading session. Conflicting market signals abound. Stronger inflation data in the Europe and a higher than forecast lift in US wages overnight put bond traders on the back foot and lifted the US dollar. Shares finished higher after intra-session gyration, but oil and copper fell. Regional markets rallied yesterday on news of further China stimulus, but the weak run of local data and a second blush reaction may weaken sentiment at the beginning of the new trading month.

A further good run of US quarterly company reports overnight helped bolster confidence. The volatile session may reflect a short term boost from month-end related buying against a backdrop of concerns about global trade and the looming US election.

Policy makers face unknowns when they announce changes. Markets may respond positively to stimulus announcements, buying risk assets as Asia Pacific investors did yesterday. However prices can also respond to the signal from policy makers that an economy is in worse shaped than hoped, and sell out of risk positions. This may see a reversal today, especially if local markets focus on the weaker industrial production and PMI data released across the region over the last twenty four hours.

Australian traders may respond to the further weakening of the Australian dollar ahead of housing and trade data due this morning. Banks remain in focus after NAB released full year numbers this morning. The 14% drop in cash profit is less than feared, and may see a relief rally.

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