The recent rally in global equities is beginning to taper off with a selloff in Asian indexes setting the tone for the European session. September has been characteristically known for pullbacks in equity markets, a pattern which may be keeping investor capital sidelined. The Nikkei and Hang Seng fell 2.37% and 1.76% respectively, while the Shanghai displayed some level divergence with a slight gain of 1.16%. Equity linked currencies like the Aussie rose in tandem with the Shanghai highlighting the prevelance of cross-asset correlations in the marketplace. While there are fundamental factors supporting price action in Aud, like better than expected GDP growth, broader risk sentiment continues and volatility remain central factor in overall market activity. Indicators of volatility like the VIX carry strong relationships to equity-linked currencies, we observe a negative correlation of 0.8 between the VIX and the Shanghai which is relative to the Aussie. In Australia, GDP data surprised the market to the upside as GDP grew by 0.6% q/q and 0.6% y/y in Q2 against market consensus expectations of .2% q/q and 0.2% y/y. The better then expected figure clearly gives the RBA room to raise rates and AUD traded higher in response. In the European session, Eurozone GDP contracted 4.7% on an annual basis which was in line with estimates. The EURUSD failed to react to the economic data, due to a lack of conviction by Traders and an already ominous tone surrounding the state of Eurozone. Comments from German Finance Minister Steinbrueck warned of challenges in financing and an extended period of weakness for the German economy before recovery. Many forecasts call for a substantial sell-off in the Euro before year-end with levels as low as 1.30. There is additional economic data among the G10 particularly out of the US, ADP employment figures and FOMC minutes are set to be released. The FOMC minutes should shed light on where the central bank stands regarding their expectations for future monetary policy, but unlikely that the statements will surprise Traders. While a correction is possible, the current lack of volume may hinder any prolonged trends in either direction leaving Traders in a range-bound environment before conditions normalize.
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