The Japanese Yen is likely to rise amid carry trade liquidation if broad-based risk aversion grows out of investors unwinding Fed QE-dependent trades.

Talking Points

S&P 500 Futures Hint Sentiment May Recover But Ample Threats Remain
Japanese Yen to Rise on Carry Liquidation if Larger Risk Aversion Triggers
Significant Policy Breakthrough Not Expected at Eurozone FinMin Summit

S&P 500 futures are pointing higher overnight and arguing for a recovery in risk-geared assets through the end of the trading week. A period of correction seems reasonable after yesterday’s bloodletting that snapped a seven-month uptrend in US equities and forced sharp reversals in crude oil and gold, particularly given an absence of high-profile releases on the economic data docket. An interesting bit to consider going forward will be whether the latest round of selling in the stocks and commodities space translates into wider risk aversion.

Fixed income and foreign exchange markets noticeably diverged yesterday, with bonds falling alongside share prices – breaking with the familiar risk vs. safety dynamic – while Yen-funded carry trades largely opted out of the fireworks altogether. This hints the volatility seen over the past 24 hours reflected an unwinding of the “Fed levitation” trade, whereby investors dumped assets dependent on continued Fed support in the wake of the FOMC rate decision, rather than a full-blown meltdown in risk appetite.

Looking beyond the Fed policy outlook, reemerging threats to the global economic recovery may well justify a true risk aversion move. The prospect of a cutback in US policy support comes against a backdrop of lingering recession in Europe and continued signs of slowdown in China. In fact, the Fed’s signal of an end in sight to the “levitation” trade has compounded an already significant outflow of foreign capital out of China’s banking system, sending overnight borrowing costs soaring to record highs. If this credit crunch translates into global contagion fears, a far broader risk-off dynamic may grip financial markets.

A meeting of Eurozone Finance Ministers in Luxembourg highlights an otherwise lackluster helping of event risk due in European trading hours. Policymakers are expected to discuss proposals for region-wide bank supervision scheme. The creation of a single regulator is a prerequisite for direct recapitalization of troubled lenders via the EFSF/ESM bailout funds and traders will be watching officials’ commentary for signs of progress, although concrete policy details are not expected to emerge.

Capitalize on Shifts in Market Mood with the DailyFX Speculative Sentiment Index

Asia Session:

GMT

CCY

EVENT

ACT

EXP

22:00

NZD

ANZ Job Advertisements (MoM) (MAY)

-1.7%

–

0.7%

1:00

NZD

ANZ Consumer Confidence Index (JUN)

123.9

–

123.7

1:00

NZD

ANZ Consumer Confidence (MoM) (JUN)

0.2%

–

3.8%

6:35

JPY

BOJ Governor Kuroda Speaks at NASB

–

Euro Session:

GMT

CCY

EVENT

EXP/ACT

IMPACT

–

EUR

Eurozone Finance Ministers Meet in Luxembourg

–

High