Financial market research and analysis

Post-Draghi optimism has come to a halt as another wave of selling hit Asian equities overnight. Shanghai’s Composite lost 6.42%, Nikkei and Topix tumbled 2.35% and 2.33% respectively. The PBoC injected 440 billion yuan via reverse repo to curb the sell-off; this has been the biggest daily injection in three years. Volatility has increased 8% as European and US stock futures join their Asian peers in the fall.

The sell-off in Asia has only stoked a fever in European markets. The large swings of late have been prescient of the fact that most equity indices are in a downtrend. The FTSE shed 100 points within an hour of trading in London amid renewed weakness in oil and commodity prices. Oil slipped below $30 again, copper slid to $1.98/lb after two hopeful sessions to take over the $2 level. Iron ore and nickel futures lost 1.10% and 1.20% respectively.

Energy and miners are back among the top losers for another day: Anglo American (-3.68%), Royal Dutch Shell (-3.67%), BHP (-3.59%), Glencore (-3.25%) and BP (-3.13%). Randgold (+1.70%) and Fresnillo (+1.37%) diverged positively on the back of a stronger demand for the safety of precious metals. Gold extended gains to $1117 as risk-off investors were on their uppers. Yield is now secondary to capital preservation and this is borne out by the fact that the return on German 2 year notes is at a fresh record all-time low.

The pound took another dive as BoE’s Forbes highlighted that the falling oil prices will allow the Bank of England to keep the rates at the current levels for a prolonged period of time. The first BoE rate hike is not considered any time sooner than March 2017. Rising selling pressure in pound hint at a further depreciation to 1.40 handle against the US dollar. Euro-pound sees support at 0.7600/0.7500. Decent vanilla calls wait too be triggered above 0.7700. The market remains hedged against a further depreciation in pound against the euro. The 1-month risk-reversal show a clear preference for euro-pound call options.


Could Fed and BoJ ease tensions?

The renewed turmoil in the market brings the Fed and the BoJ under the spotlight.

The current macroeconomic picture is certainly not appetising for additional rate hikes from the Fed. At the beginning of the year, the market assessed 50% probability for the second Fed hike to happen in March. Today, the chances for the March hike have fallen to 21.6%. According to activity on US sovereign market, the Fed may not move forward any time before September. The dollar index topped at 100 and will likely retreat further to give the commodity and EM currencies time to take a breather.

Oversees, the yen strengthened in a risk-off trading session. Although as expectations for a BoJ intervention increase, there is still no clear sign regarding the outcome of this week’s meeting. Japan’s EconMin Amari said that BoJ doesn’t signal monetary easing in advance, that it won’t be bold as ECB and appropriate steps will be taken when needed. In fact, the BoJ prefers surprise actions in order to obtain the maximum reaction from the market. Nevertheless, the persistent slide in oil prices is increasingly worrying as it decreases considerable chances to reach the 2% inflation target. On a side note, the better-than-expected rise in producer prices (0.4%y/y vs 0.2% exp. & last) failed to give relief to a highly tense market.