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Daily Insights - August 31, 2014

Higher prospect of ECB action priced in

  • Most Asian equity markets fell overnight, extending the theme of risk aversion registered in the US and Europe yesterday. Gold and silver prices rose and the VIX index edged higher. Official data, however, continue to outperform, with Korean July industrial production well ahead of forecasts, rising 3.4% y/y (Barclays: 2.8%; cf: 2.3%, which should provide further support to the view that the BoK’s recent policy rate cut was a “one and done”. Attention will turn to Q2 GDP data in India, which are expected to complete the run of positive GDP releases in the region. We forecast an increase of 5.8% y/y (cf: 5.5%), which would confirm a sharp acceleration in GDP across the region. We believe the data will also be positive for the INR, although higher risk aversion may limit potential near-term gains.
  • Japan released a slew of disappointing data, including a slight rise in the unemployment rate in July to 3.8% (Barclays: 3.6%; cf: 3.7%), a larger-than-expected 5.9% y/y drop in July household spending and a 3.3% y/y rise in the July national core CPI, in line with expectations. July industrial production and retail sales were also disappointing at 0.2% m/m and -0.5% m/m, respectively. The JPY fell slightly in response, highlighting added concerns about the pace of recovery in Japan consistent with our below-consensus Q3 GDP forecast.
  • Geopolitical concerns are escalating again with reports that suggest Russian troops have crossed the border in southern Ukraine (an area where the rebels were not present previously) and seized a few towns. This backdrop argues for a selective approach to EM.


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