While Europe’s markets threw themselves into a dead wolf bounce on news of the EU’s bailout on Monday, traders around Asia were contemplating the day’s gains in regional markets.
In a wave of what some fear could be misplaced optimism following overnight news of Europe’s massive rescue plan, Australia was one of the region’s biggest gainers, rising nearly 2.7 per cent after suffering a 6.8 per cent plunge last week on fears of European contagion, and also on concerns about the impact of the government’s proposed 40 per cent “super tax” on resources companies.
The Nikkei and Hang Seng were among other strong risers, rallying partly on analysts’ pronouncements that the EU and IMF’s emergency actions had lowered the risk of an economic crisis in the eurozone — a key market for Asian exports.
Asian credit markets also reacted sharply to the news, as the cost of protecting Asia-Pacific bonds against default saw their biggest fall in nearly a year.
As most other Asian currencies gained against the dollar, the Australian dollar saw its biggest advance of the year after last week’s battering, rising to 90.51 cents in late afternoon trading after closing at 88.25 on Friday.
So is it time to leap back into Asian markets? According to MF Global’s Japan research director Nicholas Smith: “We are absolutely not back at the races, we’re merely bouncing off the cliffs”.
For now, however, the “cliff bounces” are on a bungee rope and the contagion from Europe seems mainly positive. Dead cats, wolves or otherwise, even Marc ‘Dr Doom’ Faber acknowledges a case for piliing back into equity markets – albeit in his case for a few refreshing rounds of shorting.
As he notes in his latest “Gloom, Doom, Boom” client newsletter, issued at the weekend:
The number of stocks below their 20- and 50-day moving averages is reaching levels from which a short term bounce is becoming likely. This would also seem to be indicated by the McClellan AD Oscillator, which last week became deeply oversold. Usually, this condition is associated with near term bottoms.
Similarly, the stock market’s decline below the lower Bollinger band line indicates a near-term oversold condition the percentage of S&P 500 stocks, which are above their 200-day moving average is still very high and far above levels that are associated with favorable longer-term stock market entry points.
Therefore, he concludes, while he is “not inclined to purchase stocks – not even for short-term trading purposes”, on a rebound of between 5 and 10 per cent in individual stock prices (a move to between 1150 and 1180 for the S&P500) “I might open some short positions”.
Meanwhile, as FT Alphaville pointed out in an earlier post, the longer-term impact for Asia and other emerging markets of the EU’s audacious rescue package is sobering, to say the least. If you listen to the likes of Monument Securities’ Marc Ostwald, Asia will eventually pay a very high price for the cost of Europe’s bail-out plan.
Related links:
Towards a United States of Europe – FT Alphaville
How bad in Europe? Your cut-and-paste guide – FT Alphaville
The smell of burnt fingers wafts across Europe… – FT Alphaville