The Overnight Report: All Eyes On Japan

This story features AGL ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: AGL

By Chris Weston, Head of Research, Pepperstone

Good morning.

After the breathtaking and historic moves seen across Asian markets yesterday notably in the Nikkei 225, Kospi and Taiex- driven predominantly by a significant liquidation of margin positions we look for a solid counter rally on open today. The ASX200 is the outlier here, where SPI futures sit -0.3% lower from the ASX200 cash close (at 16:10 AEST), and while we have the RBA meeting to navigate, the index will take its steer from the Nikkei and to a lesser extent the HK50.

The implied volatility in the NY225 sits at an incredible 70% – well above levels seen in 2020, and while our opening call for the Nikkei225 suggests an open some 6% higher, this level of implied volatility almost guarantees fireworks in the price action. What happens after the open will therefore be well worth putting on the radar, and we question if the domestic and international market players build long positions into the expected positive open or use the pop for exit liquidity S&P500 and NAS100 futures will likely track the NKY225 and moves in the JPY closely.

After such a furious shake-out of leveraged positioning, with Japanese banks absolutely taken to the cleaners, it will take the bravest of investors to buy into these names with any conviction. However, while we’re already calling the index higher, a potential rip-your-face counter rally today could get attention from the fast money traders so, the tape in the Japanese banks could dictate confidence around the region, and if we see that move spill over into better buying of the ASX200 listed banks then the ASX200 should close in the green.

US equity closed lower (S&P500 and NAS100 closed -3%, Russell 2k -3.3%) and while these were significant percentage changes, one could argue the moves were not as bad as feared. S&P500 futures traded to 5120 (-4.8%) at its low, but after buyers made their moves, futures closed 2.5% above that level. NAS100 futures traded into 17,400 on two occasions and found good buying support below the 200-day MA (17,773) and we see the index 4.5% off the intraday lows.

So, it could certainly have been worse, but the storm clouds have not fully made way for sunny days just yet. Just 4% of S&P500 companies closed higher on the day – CTA’s (systematic trend-following funds) have flipped to a short position and any move lower would see them add to holdings – while volatility-dynamic funds would have more equity to liquidate as index realised volatility rises.

We also see the VIX index at 39%, and while the S&P500 implied volatility gauge did push to an incredible 65% just before the opening of US equity cash trade, a 39% VIX volatility equates to daily moves in the S&P500 of -/+2.4% (-/+5.5% weekly moves).

We also saw 3.26 million S&P500 put options traded on the day vs 1.2 million calls, as one would expect in a market that fell -3% and with options dealers holding a large short gamma position the potential hedging flows that come from a big move in the index will only add to the volatility, and the result in moves that can’t readily be explained by the news flow.  

The RBA meeting in focus

In the session ahead, we get the RBA statement and Statement on Monetary Policy, with Governor Bullock speaking shortly after (15:30 AEST). There is little chance we get a move on rates, and the prospect that the statement maintains a hawkish bias is high.

Gov Bullock will be probed on developments in the US and global economy, but while she will no doubt say the RBA is monitoring these developments, it is still too early for her to give a definitive view. 

On the calendar today:

-ANZ Bank job ads

-RBA cash rate

– RBA Governor Michele Bullock media conference

-AGL Energy ((AGL)) earnings report

-Amcil ((AMH)) ex-div 3c (100%)

-Coronado Global Resources ((CRN)) earnings report

-Cettire ((CTT)) earnings report

-Freelancer ((FLN)) investor briefing

-Arcadium Lithium ((LTM)) earnings report

-Vista Group International ((VGL)) earnings report

-Eurozone June Retail sales

-US June Trade balance

Corporate news in Australia:

-EnergyX has bid US$150m to acquire Galan Lithium’s ((GLN)) Argentinian projects, including leases in the lithium-rich Salar del Hombre Muerto region

-Regis Resources ((RRL)) is reportedly considering a joint venture for its McPhillamys gold project to mitigate risk and ensure shareholder value

-Woodside Energy ((WDS)) will spend $3.7bn on a gas-based ammonia project in Texas, its largest lower-carbon energy investment

-Centuria Capital ((CNI)) is buying a 50% stake in ResetData for -$21m

-Macquarie Group ((MQG)) to purchase a South Korean data center for $816m. Macquarie is still shopping around its stake in AirTrunk (reportedly it wants $15bn for it)

The Australian share market over the past thirty days

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author’s and not by association FNArena’s – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts on the website and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms