What is clear though is the market is actually trading quite efficiently from a technical perspective. Between February and April, the ASX 200 the market traded in a range of 6,000 to 5,750, before breaking into a 5,750 – 5,570 range in May. In the last couple of days, the market has tried to re-claim that range but the bears are forcing the index into what looks like a new range. It certainly pays to be nimble at present.
Banks have led the market lower, although all sectors are down hard on the day and volume is significant too, although this is predominantly down to the SPI futures rollover (into the September contract). Local investors have taken no heart whatsoever from the dovish FOMC statement or positive reaction in the S&P 500, although most other Asian markets are lower as well.
What we have seen today is good buying in emerging market, Australian and New Zealand fixed income, notably New Zealand where Q1 GDP was a shocker at 2.6%, some 50 basis points below consensus. The kiwi has been savaged again by traders with the market swinging to a convincing belief that we will see a further rate cut from the RBNZ in July and potentially another in Q4. Long GBP/NZD has been the trade of late and has rallied an outrageous 19% since late April, going parabolic. It seems difficult to imagine we are going to see many New Zealanders at Twickenham to watch England pick up the World Cup in September given the FX move!
Sterling in general has been fairly well bid of late anyhow and the moves in GBP/USD have been looked at closely. The pair has clearly broken out and is now at the highest level since November, with UK earnings heading in the right direction. UK retail sales will be in play in upcoming trade, so this could be the catalyst to see cable build on the breakout. On the USD side of the equation, traders will be reacting to the May core CPI print, with expectations of an unchanged read of 1.8%. A number above 2% would be a surprise given even the most hawkish economist is calling for 1.9%. However, stranger things have happened and the market would find itself having to look more favourably at USD longs.
Much ink has already been spilt on the FOMC meeting but I will say that the fact the Federal Reserve left the fed funds projection at 62.5 basis points seems a clear message that as long as the data firms, a normalisation process will occur from September. It seems like another master stroke that Janet Yellen has signalled that rates are going up with the end result being a 0.8% fall in the US dollar index, while interest rates and equities rallied too. We shouldn’t be surprised as the Fed Chairman is so in tune and aligned with markets that nearly all FOMC meetings (with a press conference) end with a positive reaction.
The fact is the market has moved on from talking about when the process of targeting a higher funds rate will take place, to one of how will they actually do it and when will the second increase materialise. I can’t see second increase this year myself, although I wouldn’t be as cautious as the IMF’s own stance of a move in 2016. However, with the market pricing in that the fed funds rate will be at 32 basis points by year-end seems about fair and implies that on balance the Fed will lift the funds rate only once. When you hear that one individual on the Fed feel rates should be at 87.5 basis points, implying around three hikes this year, it’s hard to understand exactly what they are seeing and clearly that individual is seeing the world through thick rose-tinted glasses!
I also feel they have done a lot of the heavy lifting at this meeting and by significantly cutting its GDP forecasts from a mid-point of 2.5% to 1.9%, they won’t have the issue of having to cut growth forecasts, while announcing a higher target range possibly in September.
Still, any euphoria from the FOMC meeting has been lost in Asia as the attention once again turns back to the Greek debt negotiations and the EU finance minister’s meeting. Our opening calls for European markets are looking fairly bleak at the moment and highlights traders are keen to limit long equity exposure until some sort of clarity around Greece emerges. Once again the perversity of weakness in European equities causing money managers to reduce EUR FX hedges as their portfolio capital base shrinks could be in play. This has naturally been EUR positive.
Expectations for any sort of resolution are low and after the huge levels of depositor outflows from Greek bank accounts, expectations of capital controls this weekend have really ramped up. Things have been tough in Greece for a while now, but the prospect of capital controls means things could be about to get just that little bit more painful. The irony of this all is that the more pronounced the falls in European equities is, the better the EUR holds up. Still, I feel short EUR/USD trades into $1.1400 look compelling, exiting on a move through the 15 May high of $1.1467.