Risk Aversion Dominates Asian Markets, Yen Extends Rebound

Risk aversion dominates the Asian markets today. The Nikkei is down over -2%, or -350 pts, trading back below 16000 level at the time of writing as Japan is back from holiday. Hong Kong HSI is down nearly -200 pts or 0.85%. A trigger for the selloff is disappointing services data from China. The HSBC/Markit services PMI dropped to 50.9 in December, down from prior month's 52.5. The data followed Friday's official PMI services which slowed to a four month low of 54.6. Combining the negative manufacturing PMI data released last week, the set of data suggested that China's growth slowed in Q4 in a broad-based term and could carry on into Q1 this year. Economists are expecting that China's growth would hit 7.6% in 2013, just above the official target of 7.5%.

In the currency markets, yen is the largest winner this year so far and is extending its rebound in Asia today. European majors are the weakest. Meanwhile, commodity currencies are mixed. As mentioned before, we've pointed out the case that markets are reversing the year end moves in the start of 2013. That is, European majors are turning bearish while yen is turning bullish in near term. The EUR/USD and the USD/CHF have taken out 1.3625 and 0.9001 near term levels last week already. A major focus will be on whether the EUR/JPY and GBP/JPY would follow and take out 140.99 and 170.05. Dollar could be mixed and be caught between Europeans and yen. But so far, dollar seems to have a slight upper hand to the yen.

Over the weekend, the outgoing Fed chairman Bernanke expressed his optimism that "the combination of financial healing, greater balance in the housing market, less fiscal restraint, and, of course, continued monetary policy accommodation bodes well for U.S. economic growth in coming quarters." Fed announced to taper the USD 85b asset purchase by USD 10b to USD 75b this month. Bernanke said that "didn't indicate any diminution of its commitment to maintain a highly accommodative monetary policy for as long as needed; rather, it reflected the progress we have made toward our goal of substantial improvement in the labor-market outlook."

Philadelphia Fed Plosser, a know hawk who questions Fed's quantitative easing, said over the week end that Fed may have to be "aggressive" when it comes to interest rate hikes. And he warned that "efforts to use monetary policy to offset such permanent shocks and to close what appears to be a gap will likely be ineffective and perhaps even counterproductive." Another hawk, Richmond Fed Lacker said "it made sense" to start tapering given the improvement in the labor markets. And, he expected "further reductions in the pace of purchases to be under consideration at upcoming meetings." Also, Lacker noted "a case for picking pace of tapering".

Looking ahead, Senate is set to vote on Janet Yellen's nomination as next Fed Chairman today. The current vice chairman Yellen is expected to pass the vote easily and would become the first woman to chair Fed. She will take the reins on February first as Bernanke steps down on January 31. Services data will be a major focus as Eurozone and UK will release services PMI while US will release ISM non-manufacturing index.