Asian session update
Today's big news once again comes from Japan, where a significant shortfall in gross domestic product signals that country's return into technical recession. Japanese GDP was expected to show 2.2% growth but instead indicated a contraction of 1.6%.
The dismal Japanese data release saw the Nikkei plunge lower by 3% as USD/JPY briefly rallied to 1.16 and then fell to the 1.1158 level. According to Saxo Bank Asia Macro Strategist Kay Van-Petersen, the release means the snap election and a delay in the planned sales tax increase (which were the subjects of some speculation) are now "nearly a given."
Van-Petersen added that, with Japanese prime minister Shinzo Abe set to return to Tokyo from the G20 summit in Brisbane today, we could potentially hear some news about one or both of these events as early as tomorrow, and "almost certainly within the next two weeks".
In other news from the region, strong New Zealand retail sales data showing 1.5% growth rather than a forecasted 0.8% saw some small bids gather on the NZD.
Monday also saw the launch of the Shanghai-Hong Kong Stock Connect scheme, which allowed international investors to access shares of mainland Chinese companies. As expected, "northbound" trading (outside investors purchasing mainland Chinese equities) was strong, with southbound trading less robust.
FX options
FX options trading was also dominated by the big news out of Japan, with Saxo Bank's FX Options desk saying that the overnight reaction in the yen spot market is a good example of how options can add value.
Volatility in USDJPY has doubled, but given the outlook for the Bank of Japan (the bank is expected to announce further stimulus of one sort or another), the current volatility is actually still quite low.
There are two scenarios that Saxo Bank feels are possible at the moment in time, with the first being that USD/JPY could continue to rally (as options markets are "almost in panic mode", buying extremely low delta options in large amounts.
The other outcome would be one in which markets abandoned their collective belief in the Japanese project, leading to a spot collapse.
Forex
According to Saxo Bank's Head of Forex Strategy John J Hardy. the "knee-jerk" yen rally lays the foundation for more aggressive policy decisions from the BoJ. At the moment, EUR/JPY has turned back around as the yen heads lower again.
The price action in major yen pairs, says Hardy, "could get ugly in the short term".
In the US, Hardy tells us that the dollar remains "dead in the water" as the Federal Reserve rate view is going nowhere. Though the dollar could back up a little bit more to the downside, says Hardy, this is not likely to represent the development of a trend.
Looking forward, European Central Bank president Mario Draghi speaks today, and Germany's ZEW data is due tomorrow. Both of these things could potentially affect euro trading. Looking at major euro pairs, Hardy says that EUR/GBP in particular looks "a bit overdone".
Elsewhere, the critical focus through Tuesday is on the Reserve Bank of Australia's minutes, which could give traders clues into RBA governor Glenn Stevens' plans for Aussie monetary policy. The US Federal Open Markets Committee are also set to meet this week on Wednesday.
Equities
Saxo Bank Head of Equities Peter Garnry says that the signal coming from Japanese equities is "quite clear", adding that the big drop in the Nikkei indicates that it is time for traders to "pull out of Japanese equities, take profits from the recent breakout and wait."
Looking forward, Garnry emphasises that crude oil prices are expected to remain low for some time and says that this could lead to consistent strength in the consumer staples sector.
Companies to watch, says Garnry, are carmakers like GM, Ford, Volkswagen, and BMW; brewers such as Anheuser-Busch and Heineken (not Carlsberg due to its Russian exposure); soft drink concerns Coca-Cola and PepsiCo; and consumer goods standbys Unliver and L'Oreal.
According to Garny, the consumer staples sector is likely to be "very hot over the next year".
Commodities
Last Friday's strong bounce in crude oil proved short-lived, says Saxo Bank Head of Commodities Ole Hansen, who adds that the move was likely aided by some late-day weakness in the USD.
According to Hansen, there are currently two main focuses on the oil investor's horizon: the Opec summit on November 27 and the ongoing talks concerning Iran's nuclear agenda, whose deadline is set for November 24.
A positive outcome from the Iranian talks could potentially see gains in Iranian oil supplies, while Hansen also points out that Iraqi production is rising. This, of course, will help to keep prices low as abundant supplies are currently providing much of the downward pressure in oil.
Hansen also pointed to a recent article in London's Daily Telegraph concerning the debt loads that are being carried by some of the US' large shale oil producers. According to the Telegraph's Andrew Critchlow, low oil prices could help to trigger a default cycle, with Hansen noting that decreased US production (through this or another measure) could well be a desired outcome for Opec.
In other commodities news, gold sits above 1180 USD/oz, and there are two levels that are important here in terms of gauging whether the selloff could be coming to an end. At the moment, 1193 represents a retracement level, whereas 1150 is the important point on the downside. According to Hansen, gold needs to close above 1208 USD/oz if we are to begin considering the selloff over.
Sentiment may have moved towards neutral, says Hansen, but it is not positive.
Bonds
Looking at bonds, there are a number of factors fuelling core bond investment at the monent, say Saxo Bank's Michael Boye and Simon Fasdal. The primary factors in current trading are the Japanese GDP data, ongoing geopolitical concerns and a general global lack of inflation.
Ten-year German bunds are currently testing 152, and could re-test 152.49. This morning's trading saw Eurocredit head weaker, with support here likely to come from hopes for ECB stimulus (and Draghi speaks today...).
The energy sector continues to see tremendous volatility, with Spain's Abengoa alarming investors due to accounting issues and seeing its bonds head down by 17% to 23%. In Brazil, Petrobras bonds are also trading lower on the back of an ongoing corruption case.
With markets volatile, Saxo's Bonds desk advises traders to "watch your step".
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