Reducing Risk May Be New Default Setting for Financial Markets

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TALKING POINTS – YEN, AUSSIE DOLLAR, STOCKS, US GDP, RISK AVERSION

  • Yen up, commodity dollars down as risk appetite evaporates in APAC trade
  • De-risking may now be a kind of “new normal” for global financial markets
  • Third-quarter US GDP data may encourage the sentiment meltdown further

Risk aversion returned with a vengeance in Asia Pacific trade after a brief respite Thursday (as expected). Most regional stock indices sank, pulling the sentiment-geared Australian, Canadian and New Zealand Dollars down along the way. The perennially anti-risk Japanese Yen dutifully outperformed.

Searching for a specific near-term catalyst behind the move is no easy task. A barebones economic calendar and the news wires’ favored culprits – hawkish comments from the Fed’s Richard Clarida and Loretta Mester as well as earnings reports from Amazon and Alphabet – printed well before the selloff started.

STRUCTURAL DE-RISKING TAKING HOLD ACROSS MARKETS

That leads to the disquieting thought that the markets’ default setting absent a clearly defined focal point is now brutal risk aversion. As noted previously however, that may be precisely what is happening. Festering trade wars, shaky politics and a Fed-driven rise in borrowing costs are stoking de-risking.

Indeed, the US vs. China trade spat is no closer to resolution; Italy has locked horns with the EU; a Brexit deal is elusive; anti-establishment politicians are muddying the fiscal outlook from Sweden to Brazil; and, even with the US excluded, the baseline cost of global credit has broken a decade-long downtrend.

US GDP DATA MAY AMPLIFY MARKET SELLOFF

Against this backdrop, a barebones offering on the European data docket puts third-quarter US GDP figures in the spotlight. The annualized growth rate is expected to tick down to 3.3 percent from a four-year high of 4.2 percent previously.

That may turn out to be a kind of perverse goldilocks scenario for risk aversion. An outcome broadly in line with forecasts seems like it might be a significant-enough retreat to worry already jittery investors while still looking strong enough to keep the Fed rate hike cycle on track.

See our forecasts for currencies, commodities and equities to learn what will drive prices in Q4!

ASIA PACIFIC TRADING SESSION

Reducing Risk May Be New Default Setting for Financial Markets

EUROPEAN TRADING SESSION

Reducing Risk May Be New Default Setting for Financial Markets

** All times listed in GMT. See the full economic calendar here.

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