Equity markets are lower on Tuesday (snapping a three day bullish run) after the Bank of Japan monetary policy meeting minutes produced a pessimistic policy statement and markets have started to anticipate a negative response to the Italian Treasury auction later this week. Risk assets were lower with high yielding currencies selling off and most commodities pushing lower in the session. Trading volumes remain thin even with the US stock markets re-opening, as the UK, Hong Kong and Australia are still closed for holidays.
Risks cited by the Bank of Japan were largely predictable, with the European debt crisis and the continued strength in the Japanese Yen (JPY) seen as the main areas for concern. Other macro releases out of Asia came with disappointing consumer confidence survey out of South Korea and Chinese industrial profit data. Later today, the macro focus will center on the US Home Price Index and the market is expecting declines for these figures as well. After this, the next big event risk will be seen with this week’s Italian bond auction, where 9 billion Euros in 6 month treasury bills will be sold during the Wednesday session.
End of the year tallies for the major global stock indices are showing that markets have extended losses, for the most part, as the MSCI Asia Pacific Index is down 17 percent for the year, while the Stoxx Europe is down 12 percent. These are the worst figures we have seen since 2008 but the one bright spot (if we can call it that) is the S&P 500, which is set to close the year with a 0.6 percent gain.
On the whole, trading volumes remain thin and this is leading to a slowdown in volatility, but there is a possibility that this could reverse at any time and, if this does occur, the catalyst could very easily be results of the Italian bond auction. Bond yields in Italy rose to nearly seven percent last week for the ten year notes. Seven percent seems to the “magic number” of sorts as this is the area where Greece, Ireland and Portugal began requesting bailout loans, so any increase in this for the Italian treasuries will not be viewed favorably by equity markets.
As far as data estimates, the market is expecting the US Home Price Index to show a drop of 3.2 percent for the month of October (on a yearly basis) and if this is met, it will be the slowest rate of decline since the beginning of the year. For the consumer confidence survey, the consensus is looking for a rise to 58.6, which will be the highest level since the middle of this year.
The AUD/USD is flattening out at the upper end of its recent range and resistance is now seen in the 1.02 region. A break here will see a moderate drift higher but the real level to watch comes in at 1.0330, which is a major long term Fibonacci level and project prices to rise much higher in the long term view, targeting a full retracement of the previous Fibonacci move.
The DAX is now trading in a very tight range defined by resistance at 5930 and support at 5770. We are currently caught in a longer term symmetrical triangle, so the direction of the first range break will likely be a precursor for the way the wider triangle breaks as well. Wait for a break and daily close above these levels before establishing new positions.