IG Markets - Afternoon thoughts
IG Markets - Afternoon thoughts
We suggested yesterday that the Fed Vice Chairman Janet Yellen could hit the market with further dovish rhetoric, and she didn’t disappoint. Why the USD came off as much as it did was quite surprising given her stance is well known, but perhaps it was simply the reassurance needed to keep the USD in check. Her view that unemployment should fall gradually to 7% by the end of 2014 is certainly in keeping with the Fed’s core, and it’s clear that the Fed’s number two is not looking at changes anytime soon. Recall that Ben Bernanke himself believes unemployment won’t reach 6% - half a percentage point below its target until 2016. There were further dovish comments from Minneapolis Fed President Narayana Kocherlakota. However, it is clear that in the last few days some of the key members of the Fed have pushed back and directed markets that they aren’t going anywhere anytime soon and the core of the Fed still feels the benefits of asset purchases outweigh the costs.
The moves in cable were probably the most pronounced and testament towards the level of one-sided positioning in the pair. Perhaps the moves above 1.51 represent a selling opportunity ahead of today’s services PMI data and BOE meeting on Thursday. There’s no beating around the bush; the recent of string of UK data has been terrible and if the more important services PMI follows the manufacturing and construction PMI lead and comes in sub 50.0 (market eyeing 51.0), then sterling should find sellers again. Talk overnight of a potential Italian downgrade had a few fixed income traders pushing into the gilt market, and these inflows helped boost sterling flows as well.
Asia has found strong buying action after yesterday’s bloodbath in China. S&P futures were down 0.6% at yesterday’s close of the Australian cash market, so it was pricing in a poor US session, which of course didn’t eventuate given Janet Yellen’s comments. Copper also held up well despite China property fears, although the technicals on LME copper haven’t looked too flash of late having broken the 200-week moving average (7741) and also completing a large triangle consolidation on Friday, potentially giving it a target of 6050. Traders will be looking at strong support which should be seen well before this target between 7267 and 7219 (the uptrend from June 2010 and multi-year head and shoulders pattern neckline). Out of interest, Goldman Sachs put out a buy recommendation earlier in the week suggesting September copper could push up to $9000 per tonne over the coming months.
China has found buyers today, and while all the talk yesterday was around property, today’s sentiment seems a little more robust. Commentary from China’s National People’s Congress seems upbeat and although it is once again targeting GDP of 7.5%, the market still expects this to be a modestly conservative estimate. All-in-all the gains today are more a reflection that yesterday’s falls were overdone; the fact the PBOC refrained from removing liquidity also helped.
It’s always good to see uber-bear Andy Xie pop into the headlines after a sizeably down day. Perhaps one day his bearish calls will come to fruition (iron ore sub-$60), in which case we suspect AUD/USD will fall markedly lower than it did in September. We don’t think the same reserve manager diversification flows will come into the bond market and effectively prop up the Aussie this time around.
The ASX 200 has been a pillar of strength today and it’s really only the utilities sector that has found sellers. AUD/USD has also been in focus, not just because of the failed break of the multi-month range of 1.0149, but because of the raft of data out during the day. Earlier in the day services PMI, net exports as a percentage of GDP, retail sales and the current account deficit all came out favourably for the local unit and saw the pair print a high of 1.0224. Later, the fact that the RBA didn’t cut rates won’t surprise too many, and while the statement maintained a mild easing bias, on the whole we felt there was nothing in the narrative which either deviated from recent RBA commentary or gave an impression it was looking to cut anytime soon. AUD/USD spiked to a high of 1.0241, although AUD/NZD (the purest read of future monetary policy) was basically unchanged. Looking at the OIS market, traders took the statement as marginally less dovish, pushing rate cut expectations to 38 basis points (bp) over twelve months, from 41 bp before.
Opening calls for Europe look quite constructive as things stand, and while the UK services PMI numbers could have big ramifications for sterling, good reads on services PMI in Europe and the US could also boost sentiment. We will pay close attention to the employment sub-sector of the US services numbers given the contribution that retail provides to the US economy. Fed member Jeffery Lacker also speaks, although he is a non-voting member of the board.
The FTSE will be in focus given the raft of corporate reports out today, and while names like Glencore, Standard Chartered and Xstrata carry a combined weight of 4.1% of the FTSE, their comments could have further reaching impacts. Of course the focus will be on how much detail Glencore provide on the merger, and any timing on the approval from the Chinese regulator MOFCOM.
Ahead of the open we are calling the FTSE 6375 +30, DAX 7734 +43, CAC 3731 +22 and IBEX 8306 +60