Focus Shifts to G20 After Market Rout

A second day of post-FOMC risk aversion left deep wounds in the risk trade and major technical damage on a number of fronts. AUD and NZD have led a bounce in early Asian trading as the market looks to the G20 for optimism. Japan is closed for a holiday.

It was truly a day of reckoning in markets as traders woke up to the reality that major economies are stagnant and the Fed is nearly tapped out. After deep falls in European trading most currencies stabilized in North America even as US stocks slumped.

Hopes for fiscal action are building as leaders meet in Washington for the G20. No communiqu is expected from the meeting but U.S. Tsy Sec Geithner hinted at the agenda, saying the US wants leaders to err on the side of providing more support. UK leaders later shot back, saying nations need coordinated action on fiscal consolidation.

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The other main topic will be stability in the banking sector, especially in Europe. Canadian Fin Min Flaherty warned there will be a global financial crisis if Europe doesnt deal with Greek problems. The FT reported that the EU will demand immediate recapitalization at 16 mid-sized banks but the European Banking Authority later denied the report.

With the data calendar light until markets close for the week, the G20 is the only credible hope for a reversal in market sentiment. As it stands, the declines in several currencies and commodities point to deepening technical weakness. EUR, CAD, AUD, Oil, silver and many others are clinging to critical levels.

With treasuries rallying and risk aversion at extreme levels, the knee jerk reaction is to buy USD/JPY but with the pair hovering near record lows, trepidation is holding traders in check. Comments on Thursday from Japanese leaders continued to repeat past warnings about taking decisive action against excessive yen rises but Fin Min Azumi also noted that yen rises will ease if confidence is restored. The final comment indicates that working to ensure stability (especially in Europe) is the governments chief priority, not intervention.