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Talking Points:

• S&P 500 Futures Hint Asia-Hours Risk Aversion Likely to Carry Forward

• British Pound Looks to UK PMI Data to Drive BOE Rate Hike Expectations

• Gauge Trends and Spot Reversals in Leading Currencies with DailyFX SSI

The Australian, Canadian and New Zealand Dollars plunged while the safety-linked Japanese Yen outperformed as risk aversion swept the financial markets start of 2016 trade. Indeed, the moves played out alongside sharp declines across Asian stock exchanges. This may reflect the return of liquidity following the holiday lull, with investors establishing 2016 portfolio allocations.

As we’ve noted previously, a bias toward risk aversion in the first act of 2016 seems to make sense. The Fed’s aggressive easing effort over the past seven years slashed returns on safer assets and encouraged a reach for yield outward along the risk spectrum. With short-term borrowing costs seen rising as the FOMC begins to withdraw stimulus, a reversal of this dynamic is likely to drive portfolio adjustment that sends sentiment-linked assets including stocks and higher-yielding currencies downward.

Worrisome news-flow may have amplified investors’ sour mood. China’s Caixin PMI data unexpectedly showed factory-sector activity contracted at an accelerated pace in December compared with the prior month. Meanwhile, Fed Vice Chair Stanley Fischer warned that rate hikes may be used to combat asset prices that are “excessively high”, hinting that the US central bank is not beyond explicitly using tightening to cool risk appetite.

Looking ahead, S&P 500 futures are pointing sharply to suggest the risk-off dynamic is likely to carry forward. A slight pickup in German CPI putting the headline year-on-year inflation rate at 0.6 percent seems unlikely to stir much a response considering the ECB has already committed to QE into 2017. UK Manufacturing PMI will be sized up to see if domestic growth can find adequate momentum to overcome imported disinflationary pressure from the Eurozone. An upside surprise may rekindle BOE rate hike bets, boosting the British Pound.

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