HomeBusinessReduce risks, seek safety as tensions rise in the Middle East

Reduce risks, seek safety as tensions rise in the Middle East

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets.

Asian markets are set to open defensively on Monday as heightened tensions in the Middle East fuel strong demand for safe havens such as the dollar, gold and US government bonds, at the expense of equities and local currencies.

Investor sentiment already turned negative on Friday after the stock market slump caused by US bank profits. JP Morgan shares suffered their biggest decline in almost four years and world stocks lost the most in six months.

US stock futures are pointing to another sharp decline at the open on Monday, so it is likely that Asian markets will follow suit. Oil prices, which hit a six-month high on Friday, are likely to rise further on Monday.

In such a febrile environment, local Asian economic indicators and events are likely to take a back seat. Monday’s calendar is quite light, with only Indian trade and wholesale price inflation data and Japanese machinery orders.

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China’s first-quarter GDP on Tuesday and Japan’s consumer price inflation figures on Friday are the two economic indicators from Asia that could move local markets the most this week.

But at least on Monday, investors will focus on reducing risk and playing it safe, and there could be a big move in the Japanese yen in that regard.

The yen is traditionally seen as a ‘safe haven’ that thrives in times of heightened risk aversion, boosted by large repatriation flows from Japanese investors and short-covering by currency traders who use the yen to finance carry trades.

And there’s a big short position to cover: the yen is at a 34-year low, below 153.00 per dollar, and the latest US futures data shows hedge funds’ net short yen position the largest in 17 year.

To the surprise of many, Japanese authorities have not yet intervened to stop the rot, despite officials’ near-daily warnings that “excessive volatility is undesirable” and that Tokyo is ready to respond to sharp currency swings.

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Perhaps Tokyo has not yet acted because the yen’s decline is fully justified on ‘fundamental’ grounds: US yields and implied rates are rising faster than their Japanese equivalents because US growth and inflation are higher than Japan’s.

However, the strong dollar and the recent rise in US bond yields pose potentially significant problems for Asia. They mean a tightening of financial conditions and make servicing dollar-denominated debt more expensive.

A sharp fall in government bond yields, as investors scramble to reduce risk in their portfolios amid rising geopolitical tensions, is unlikely to provide much relief.

Here are the key developments that could give markets more direction on Monday:

– India trade (March)

– Indian wholesale price inflation (March)

– Machine orders in Japan (February)

(By Jamie McGeever; Editing by Diane Craft)

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