Fear No Match For This Market

A small de-escalation in the Ukraine was all risk trades needed to rip higher. The classic carry trade of NZD/JPY was tops in the FX market while the S&P 500 rallied 1.5% to a record high. Australian GDP and the start of the Chinese National People's Congress are events to watch in the hours ahead.

We wrote yesterday about how the declines in FX risk trades, especially the yen crosses, were surprisingly small considering the fear in markets. That proved to be a prescient signal with sentiment completely reversing on Tuesday and the yen trades rebounding.

USD/JPY is flirting with Friday's high of 102.29 after falling as low as 101.20 on Monday. A litany of risk events remain on the schedule for the week so volatility is sure to continue.

Fundamentally, little changed in the day but it was a great example of how fear, especially geopolitical fear, can cause the market to overreact. Another small example came in US trading: risk trades shuddered on reports of Russia test firing intercontinental missiles but it turned out to be a long-planned test and the US had been notified long before any tensions in the Crimea.

Headlines from the Ukraine will keep traders on edge but markets have probably learned a short-term lesson from this episode and unless bullets fly, the fear trade is unlikely to take hold again, at least in the way it did on Monday.

Instead, fundamentals will be a driver and in Australia that means Q4 GDP at 0030 GMT. The consensus is for a 0.7% q/q rise, a slightly better pace that 0.6% climb in Q3. The RBA is in data-watching mode so every release takes on more importance.

The other event to watch is the opening of the People's Congress in China. This is a major events and in the hours ahead the economic targets and reform policies will be announced. The consensus on the  GDP target is 7.5% but there is some talk that a formal target could be abandoned. A higher number could help boost AUD.