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Shinzo Surprise

by Sean Coakley | August 2, 2016

An avalanche of new data and political developments have traders in a cautious mood ahead of the North American open. With oil sliding below 40 dollars a barrel, new stimulus measures in Japan and a rate cut in Australia there clearly is a lot of news to digest.

One of the more impactful developments of late has been new fiscal stimulus measures undertaken in Japan as the country continues to grapple with the deflationary impacts of its now twenty-year recovery from 1990’s asset price bubble. Just today PM Shinzo Abe announced a $45 billion stimulus package aimed at boosting consumption. Accordingly, the yen gained while equities in across the globe continued to struggle in light of diminished sentiment and fears of trouble in the European banking sector. Looking southwards we also saw a counterintuitive jump in the value of the Australian dollar in the wake of the RBA’s decision to cut rates in an effort to combat waning growth in an economy impacted by declining commodity prices.

With trading well underway in the European session, the same diminished sentiment pervades. With European bank stress tests causing anguish for some traders equities are largely in the red while the mighty US dollar has begun to see some weakness as both the pound and euro put in gains. Driving much of the activity in Europe has been continued weakness in crude oil prices as the European index has dipped below $40 a barrel. With oil traders now coming to terms with the reality that there is still a significant oversupply of the commodity along with weaker global growth prospects the recent declines could easily be sustained.

Ahead of the North American session equity futures are signalling that the same malaise infecting traders in Asia and Europe will likely make its way over the Atlantic. Even in light of declining oil prices the loonie has edged higher against its American counterpart as expectations for the timing of future rate increases continuously shift as new economic data emerges. As the latest round of manufacturing and income data coming in for the US economy has been mixed this likely will continue until true signs of the US economy’s resilience and continued divergence from the rest of the world re-emerge.

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