Volatility shock fades, India CPI up By Reuters

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets.

A week is just not a long time in politics.

Seven days ago, a huge rally in yen trading and a sell-off in US megacap tech sparked a wave of volatility that sent global markets reeling and investors running for the safety of US Treasuries.

As the new trading week begins in Asia on Monday, that seems like a long time ago – many assets have recovered much of those losses, volatility has eased and traders have scaled back rate cut expectations.

The question now is whether this momentum can be sustained. Some investors will take advantage of lower equity volatility to increase risky assets again; others will be on the lookout for potential aftershocks in any corner of the market, especially in mid-August when liquidity is much tighter than usual.

The Asian Monday calendar is easy. Consumer price inflation in India is the main event, leaving markets at the mercy of global forces.

If that’s the case, Monday should be relatively calm. Wall Street rose on Friday, meaning the Nasdaq and ended last week basically flat. Treasury yields fell on Friday but posted their biggest weekly gain in months.

Stronger-than-expected US economic data suggested recession fears were overblown, and several poorly received US debt auctions pushed yields higher. No bad thing, perhaps, if you think the previous week’s plunge was excessive.

The return of Asian markets last week was quite impressive. After posting its second-biggest drop on record and third-biggest gain ever in 24 hours, the index ended the week down just 2.5%.

Other benchmarks fared even better – both ended flat, with the MSCI Emerging Market index up 0.2%.

In currencies, US futures data showed on Friday that hedge funds reduced their net short yen position in the week to August 6 by 62,000 contracts. This is the yen’s biggest weekly change since the Fukushima disaster in February 2011 and the third biggest since comparable data began in 1986.

If this is representative of the broader currency market, the short yen carry trade has largely been wiped out. Are traders starting to short the yen and carry again or not?

Indian inflation is the main data point in Asia and comes after the Reserve Bank of India kept its key interest rate unchanged at 6.50% last week, shrugging off market turmoil and focusing on reducing inflation to its target of 4% in the medium term.

The consensus in a Reuters poll is for annual consumer inflation to fall to 3.65 percent in July from 5.08 percent in June. This would be the first time in five years below the RBI’s medium-term target.

Here are the key developments that could provide more direction for Asian markets on Monday:

– Indian Interest Rate Decision

– industrial production in India (June)

– Wholesale inflation in Germany (July)