Risk Aversion Continues As JPMorgan Chase Loss Pressures Stocks

Risk aversion continued to dominate markets Friday as equity markets were hit by surprise $2b loss off JPMorgan Chase, the biggest US bank by assets. Asian indices are broadly lower with Nikkei down -0.44%, HSI down -1.18% at the time of writing. Gold is back under pressure after failing to sustain above 1600 level on recovery. Crude oil is also soft at around 96 level. The Dollar Index is trying to move away from 80 level for the moment even though momentum is not too convincing yet. EUR/USD extends recent decline and is heading to 1.29 level but other pairs are staying steady in range, with firm tone in dollar and yen.

Former finance minister Venizelos, the third party leader given the mandate by Greek president to form a coalition government after election, will meet with conservative Samaras today. Venizelos was a bit more optimistic after meeting with Democratic Left leader Kouvelis and said the views "are very close." But markets are pessimistic there will be any solid outcome today. And even if there are agreements between New Democracy, Pasok and Democratic Left, Kouvelis has made it clear he'd negotiate a gradual "disengagement" from austerity measures agreed for bailout. There are still much uncertainty on whether Greece will have new election, default its debt, and leave eurozone.

Spain is expected to outline measures to recapitalize the financial sector today. It's reported that an extra EUR 35b against loans made to the building sector would be required to set aside, in addition to the EUR 54b already set aside for this year. Markets have been so far positive to nationalization of Bankia, the country's fourth largest lender. But note that Spanish banks have been unable to get support from funding markets this year on high funding costs. If the government's plan fails to restore confidence, the situation could worsen further.

In China, headline CPI gained 3.4% in April y/y, down from 3.6% a month ago. Deceleration in price levels was seen in a wide-range of categories, including food prices which were once the key driver of inflation. The recent announcement of retail fuel price cuts will add pressure to disinflation in the near-term. It is expected. The downtrend is expected to continue until a rebound is seen by midyear. Other data from China saw industrial production rose 9.3% yoy, fixed assets investment rose 20.2% YTD/Y, retail sales rose 14.1% yoy, all below expectations.

Looking ahead, Canadian employment data will be a major focus. The loonie has been under much pressure in May on risk aversion, and on weakness in crude oil. Last month, BoC turned hawkish on optimism in the economy and opened the door for rate hike. But after that, economic data were generally quite weak. Nonetheless, Canadian dollar is still relatively stronger comparing to other commodity currencies. Today's data will be important in deciding the comparative strength of CAD against AUD and NZD in near-term. Markets are expecting Canadian economy to add 10k jobs in April with unemployment rate risen to 7.3%. Other data to be watched include UK PPI, US PPI and U of Michigan sentiment.