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Video / 22 May 2017 at 7:31 GMT

From the Floor: Risk-on in Asia after Fed's Bullard hits dovish note

#SaxoStrats
  • Risk-on sentiment lifts Asian equities, led by energy and raw materials companies
  • Fed's Bullard said projected path for raising rates may be 'overly aggressive'
  • Treasury yields rise despite dovish comments from Bullard
  • Oil prices up on deeper-for-longer production cut speculation
  • Gold stuck in $1,245-1,265/oz range
  • Prelim Eurozone PMI figures key for sentiment and flow into equities: Garnry
  • Fixed-income risk sentiment improves; market remains sensitive to Trump headlines
  • Eyes on Brazil rebound before preliminary impeachment hearing of president Temer
  • Euro area finance ministers meet Monday to discuss debt relief for Greece
Saxo Strats banner
 By John Acher

A wave of improved risk appetite swept across Asian equity markets on Monday, partly driven by dovish tones at the end of last week from St. Louis Fed president James Bullard who cast doubt on the pace of US monetary tightening.

“It’s risk-on mode this morning in Asia,” says Saxo Bank’s Tareck Horchani at the bank’s Singapore hub. “Oil traded at $51/barrel, and all Asian equities are up, helped by energy and raw materials companies.”

The rally in Asian stock markets was fuelled partly by dovish remarks on Friday from St. Louis Fed president James Bullard, who cast doubt on the speed of Fed tightening by saying the projected path may be may be “overly aggressive” and that economic data since the Fed’s March meeting has been relatively weak.

Bullard’s remarks did not derail expectations for an interest rate rise at the Fed’s June meeting, but cast some doubts about the pace of tightening further ahead. Minutes of the Fed’s May FOMC meeting are slated to be published on Wednesday.

“This means to me that they might slow down a lot after this (June) meeting,” Horchani says. “So we are already seeing good inflows this morning in Asian equities.”

The inflows were benefiting exchange-traded funds for Asian equities and also Asian government bonds, he says.

Asian equities ETF AAXJ
Asian stocks ETF
Source: Saxo Bank 

“I think we might resume this trend higher if there are less rate hikes after the June meeting,” Horchani says.

“There is strong interest in EURJPY on the top side,” he says.

PMIs key for equities

European markets will get a key reading on Tuesday in the form of preliminary Eurozone PMIs.
“Those preliminary PMI figures are extremely key for sentiment and continued flow into European equities as we have been talking about for a couple of weeks,” says Saxo Bank’s equities strategy chief Peter Garnry.

European markets are also focused on a meeting of European finance ministers in Brussels about potential debt relief for Greece.

“We are getting closer to debt relief,” says Garnry. “It’s projected at 180% debt to GDP – it’s unsustainable for Greece -- you all know that – so they will probably need more debt relief, and that is what is being discussed today.”

Markets are also closely eyeing developments in Brazil and whether Brazilian assets will continue to rebound from the big selloff on Thursday triggered by political turmoil surrounding the new president, Michel Temer, who is implicated in a corruption scandal.

“We had a small rebound on Friday, but this is a fresh week, and let’s see how foreign investors, especially the longer-term EM investors, are reacting to all the political noise and crisis in Brazil,” says Garnry.

The Brazilian equity market looks cheap from a valuation perspective, says Garnry, “but obviously you should have a premium for the massive amount of political uncertainty in the country, so that’s something you need to balance.”

Preliminary impeachment hearings are scheduled to be held this week in Brazil amid the widening corruption scandal.

“Brazilian assets and bonds rebounded a little bit [on Friday] in yield terms,” says Saxo Bank fixed-income trader Michael Boye. “But this is still, in my view, hands-off territory. Confidence has taken a set-back, and we need to see how this story unfolds, especially given the strong performance that Brazil has had all year.”

Brazilian 10-year bond yield
Brazilian 10-year
Source: Bloomberg

“This could potentially end up in a total re-set for Brazil, if we see an impeachment of the new president,” Boye says.

Risk sentiment in the fixed-income markets improved somewhat on Friday, though the Trump-Comey saga still hangs as a cloud of uncertainty, Boye says.

Results from major Canadian banks on Wednesday and Thursday will be closely watched after the mortgage crisis at the Canadian non-bank mortgage lender Home Capital Group. “All the big banks will report,” says Garnry. “They cannot escape analysts’ questions into what they see in the mortgage market. I think it is going to be extremely critical for the Canadian currency, but also the Canadian stock market.”

Oil up ahead of Opec meeting

Bullish bets on oil fell to a five-month low in the week to May 16, driven by short-selling, which hit a fresh six-month high. But oil prices rose on Monday, helped by speculation about deeper and longer Opec-led production cuts. 

Oil futures rise on growing optimism for longer, deeper Opec cuts
Oil prices
 Source: Saxo Bank

“We have a big week ahead of us with the Opec meeting on Thursday,” says Saxo Bank’s commodities strategy chief Ole Hansen. “Opec has to deliver, they probably will – the question is whether it will be six months or nine months, or whether they can agree on deeper cut than they have achieved so far.”

Cutting is the challenge because of rising domestic demand among Opec producers over the summer, says Hansen. “That basically means that if they cut production further, they have to export even less, and that would further eat into market shares, and that could become a bit of a contention, especially as we see the US rig count rise to the highest since last May.”

“I think the best they can achieve at this stage is basically to stabilise the price. I don’t see major upside just yet, we really need to see the data start to support the rally that we have seen over the past few weeks,” Hansen says. “Once again, it shows that being short ahead of an Opec meeting doesn’t pay off, and we will have to see what comes out on Thursday.

Gold is stuck in a range between $1,245 and $1,265/oz. “A break on either side would determine where we go from there, so those are the levels to look out for,” Hansen says. 


Asian financial data display
 Bullish in Asia after dovishness from the US. Photo: Shutterstock


John Acher is a consulting editor at TradingFloor

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