he selloff in risk markets that started after the Bank of Japan held the line on interest rates yesterday has continued through today’s European and North American trading sessions.
This retreat has exposed a major vulnerability in the recent stock advance. Stocks have risen dramatically in recent months driven be inflows of fast QE money, while commodities
and resource currencies have been trending lower on concerns over the health of major world economies, particularly China and Europe. This disconnect has left stocks increasingly overvalued and addicted to QE stimulus to keep the party going. The negative reaction to the Japanese decision indicates that markets need more and more stimulus to justify current levels, leaving stocks highly vulnerable to a correction.
While Japan has been in correction mode since its round trip between 14,000 and 16,000 last month, and Europe has been retreating since the beginning of June, it is only in the last couple of days that US markets have started to be impacted.
With QE money continuing to come in, we may not see the big double digit percentage declines that followed the end of the last two QE programs. Rather we may see increased volatility and trading opportunities on both sides emerge over the last several months as the forces of overvaluation and monetary support battle it out.
As the first region to start into the correction, Asia Pacific may also become the first region to finish. We have now seen significant retracements across a number of markets and previously overbought conditions have eased.
Some markets may even be starting to get oversold. In particular, AUD and NZD increasingly appear due for a rebound. Overnight, both currencies sold off and then rebounded. It appears that traders may have thrown in the towel and capitulated but both dollars may still be active through the rest of the week with Australia employment and a RBNZ interest rate decision scheduled for Thursday.
Stock markets across the region may also be active today. Japan and Hong Kong sold off yesterday but appear to be getting close to washed out for now. Australia staged a catch up rally but miners could be impacted off of falling copper and gold prices. Resource weighted Canadian indices traded lower basically in line with the US today, while the resource weighted FTSE fell less than its continental counterparts.
Highlights of overnight announcements include:
UK industrial production (0.6%) as expected
UK manufacturing production (0.5%) vs street (0.3%)
UK NIESR GDP estimate 0.6% vs previous 0.8%
Upcoming significant announcements include:
9:00 am AEST South Korea employment street 3.1%
9:50 am AEST Japan machine orders street (4.3%)
10:30 am AEST Australia Westpac consumer confidence previous 97.6
3:30 pm AEST India industrial production street 2.5%
6:30 am BST France Q1 non-farm payrolls
7:00 am BST Germany consumer prices street 1.5%
7:45 am BST France consumer prices street 0.9%
8:00 am BST Spain consumer prices street 1.7%
10:00 am BST Eurozone industrial production street (1.2%)
9:30 am BST UK jobless claims street (5K)
9:30 am BST UK rolling 3M employment street (11K) vs previous (43K)
9:30 am BST UK unemployment rate street 7.8%
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