Volatility Shock Eases as India CPI Approaches – Reuters

By Jamie McGeever

A look at the day ahead in Asian markets.

A week can feel like a long time in the financial world. Just seven days ago, a significant reduction in the yen carry trade and a selloff in major U.S. technology stocks caused a wave of volatility that unsettled global markets and drove investors toward the safety of U.S. Treasuries.

As a new trading week begins in Asia, the events of last week seem distant. Many assets have recovered considerably, volatility has decreased, and traders have notably reduced their expectations for rate cuts.

The pressing question now is whether this positive momentum can be maintained. Some investors may take advantage of lower equity volatility to once again invest in higher-risk assets, while others remain cautious about possible aftershocks from various market segments, particularly in mid-August when liquidity tends to be lower than usual.

Monday’s economic calendar in Asia is relatively sparse. The primary focus will be on Indian consumer price inflation, leaving markets susceptible to global influences.

Assuming global factors dominate, Monday is expected to be relatively stable. Wall Street experienced a rebound on Friday, with the Nasdaq closing the week close to flat. Although Treasury yields fell on Friday, they still marked their largest weekly increase in months.

Stronger-than-expected U.S. economic data indicated that recession fears may be overstated. A couple of U.S. debt auctions that were not well-received also contributed to the rise in yields. This increase might not be undesirable, especially for those who view last week’s drop as overly drastic.

Asian markets managed a notable rebound last week. Despite the index experiencing its second-largest fall on record followed by its third-largest rise in a single day, it ended the week down just 2.5%. Other major indices performed even better, with both the and the closing flat, while the MSCI Emerging Market index inched up by 0.2%.

In the foreign exchange market, data from the U.S. futures market indicated that hedge funds reduced their net short position in yen by 62,000 contracts in the week ending August 6. This is the most significant weekly shift towards yen bullishness since the Fukushima disaster in February 2011 and ranks as the third-largest since similar data tracking began in 1986.

If this trend reflects broader foreign exchange market behavior, the short yen carry trade has been largely dismantled. The question remains whether traders will start shorting yen and reinstating carry trades.

The Indian inflation figures are the key data point in Asia, especially following the Reserve Bank of India’s decision last week to maintain its benchmark interest rate at 6.50%. The bank is prioritizing inflation reduction, aiming for a medium-term target of 4%.

According to a consensus from polls, annual consumer inflation in July is anticipated to drop to 3.65%, down from 5.08% in June. If this figure materializes, it would be the first time in five years that inflation has fallen below the Reserve Bank’s medium-term goal.

Key developments that could provide further direction for Asian markets on Monday include:

• India’s interest rate decision
• India’s industrial production data for June
• Germany’s wholesale inflation figures for July