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Governor’s speech settles the mood

15.28 AEDT, Friday 22 February 2013

Governor’s speech settles the mood

By Tim Waterer (Senior Trader, CMC Markets)

With the FOMC playing the role of the Fun Police this week by contemplating stimulus withdrawal, financial markets have shown their petulant side after a period of prolonged best behaviour so far in 2013.

The Fed Minutes gave traders a glimpse into the QE-free future. Clearly the idea of the US economy having to support itself without relying on stimulus was too much to bear for investors at this stage, as evidenced by the size of the market downswings this week. Any winding down of asset purchases should signify an improving economy and one that is no longer in need of life support which by itself should be a good thing, but traders just don’t have the confidence in the economy to see it walking under its own power yet.

The speech by the RBA Governor appeared to come across as the voice of reason today in settling some rattled nerves. In fact, the rather hawkish tone struck by Glenn Stevens on the state of the global economy was in stark contrast to the risk-off conditions which sent equity markets plummeting the day prior. Based on the Governor’s comments today a conclusion could be reached that the level of interest rates has already bottomed out, which saw the AUD immediately come back into favour on the yield implications if in fact the end of the easing cycle has already been reached.

Australian investors appear to have dusted themselves off after the heavy fall on Thursday with the ASX200 posting a comeback performance to end the week. The relatively rosy tone conveyed by the RBA Governor earlier in the day appeared to rub off on investors who re-commenced the search for yield, with the banking stocks again helping to drive the local bourse higher. All in all it was a solid recovery on the ASX given the weak offshore leads as well as subdued performances across other Asian markets.

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