As we correctly predicted in our last post equity markets in Asia closed in the red: Nikkei: -1.98%, Topix: -1.49%, and Hang Sang: -0.08%. EUR/USD, GBP/USD, and AUD/USD moved sideways in the Asia session and picked up momentum in the European session. We are now flat and waiting for another opportunity.
I have a bearish outlook for the rest of the week due to U.S. earnings, the debt crisis in Europe, the slowdown in China, and the Chinese/Japanese conflict over a group of small desolate islands. In terms of the U.S. earnings, companies have been underestimating their earnings so that they can outperform. This may seem smart, but the market has caught on, and now companies' results are being examined much more carefully. In terms of the debt crisis in Europe, negative developments within the Eurozone should cause the Euro to fall as there is nothing for market participants to look forward to in the short term. (Think Spanish bailout, additional stimulus from the ECB, etc.) The Chinese/Japanese conflict does not look like it will be resolved soon, as the PBOC governor recently canceled a trip to Japanese. The Chinese economy continues to slow and PBOC continues to stimulate via reverse repos. If we see an increase in risk appetite, I think it will most likely come via rumors of Chinese stimulus.
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