bargain hunters to the rescue in asia 1985692015

It has been an interesting day in the markets, with most equity markets outside of China erasing all of their opening losses as bargain hunters see some value. The ASX 200, the Nikkei 225 and Hang Seng all managed to climb back into the black, with the former up around 3% at one stage.

The ASX 200 dropped below 5,000 at the open, before bargain hunters saved the index and pushed it back above this all-important psychological level. The drop below 5,000 for the first time since was enough to encourage some long-term bulls back into the market and the index even nudged 5,150 at the top of today’s rally.

The biggest threat to today’s rally is if it loses steam in the overnight sessions. After all, the fundamentals haven’t changed much since yesterday; China’s economy and stock markets are still clearly in trouble.

The Shanghai Composite looked set to open around 6.4% lower at one stage, but it’s only around 4.3% lower at the time of writing. Nonetheless, if policy makers don’t taken action to support the markets, then the sell-off may continue in China, further infecting global investor sentiment.

Is the sell-off in the ASX making the RBA more dovish?

There’s some chatter in the market that the recent market turmoil will cause the Reserve Bank of Australia (RBA) to loosen monetary once again. The market appears to be pricing in almost a 40% chance that the bank will lob 25bps of the official cash rate at its next meeting, up from only around 20% at the beginning of last week. This has contributed to a big sell-off in the aussie, with AUDUSD spiking as low as 0.7050 last night, before pushing back above 0.7200 in Asia.

However, the recent sell-off isn’t large enough to weigh heavily on investment or consumption in Australia, thus it’s likely not enough to force the bank into a more dovish stance. Yet, the obvious deterioration of Australia’s largest trading partner is of great concern to the RBA, but it’s not yet at crisis point – the PBoC has a lot of policy ammunition to expel on the economy.

The big event this week for the outlook of interest rates in Australia is the release of Australia’s Q2 private CAPEX report:

• It’s no secret that Australia’s economy is struggling from a lack of corporate investment. The traditional heart of the economy, mining related sectors, has been pinned down by falling commodity prices and a general lack of global resource demand. Meanwhile, non-resource parts of the economy have failed to pick up the slack, so the RBA has stepped in to support the broader economy. In Q2, private CAPEX is expected to fall 2.5% (2015-2016 CAPEX is expected to be around $111bn); it’s also worth keeping an eye on business investment intention numbers in the report.