Trader's View - Fed takes air out of equities

The pointy end of the week is under-way, and if only relatively speaking, markets are moving on the back of several key stories.

Market data Source: Bloomberg

A night loaded with information

The pointy end of the week is under-way, and if only relatively speaking, markets are moving on the back of several key stories. Naturally, the centrepiece of this is Wall Street; and there’s been a timely mix of corporate data, economic developments, central bank meetings, and politics for market participants to digest. The intra-day battle of these narratives has caused some modest, but interesting enough, price action in financial markets overnight; with Apple’s earnings beat, weak ISM Manufacturing PMI data, a more neutral US Federal Reserve, and sputtering trade-talks between the US and China combining to twist market sentiment in interesting ways.

The Fed centre of market attention

Proving itself once more to be the gravitational centre of the financial universe, the US Fed meeting has had the greatest hold over market participants overnight. The Fed delivered the news that many traders had been expecting: it doesn’t possess the “dovish” disposition that interest rate markets are implying. While the Fed did effectively downgrade its inflation forecasts, and dropped the interest on excess reserves to 2.35%, Fed Chair Jerome Powell went to lengths to implore in his press conference that the Fed remains truly patient. That is: interest rates could move either higher or lower from where they are now.

Markets sell-off on Powell’s neutral tone

After somewhat of a tussle, intraday price action suggests a market that has bought into Fed Chair Powell’s words. Having eked out another small gain to its all-time highs, touching 2954 in early North American trade, the S&P 500 has sold of post-Fed meeting, to have shed in the realm of 0.7% in the final two hours of the Wall Street session. Predictably, the US Dollar has rallied as traders unwind some of their bets on interest rate cuts from the Fed this year, leading to a lift in US Treasury yields at the front end of the US yield curve.

Weak US economic data compounded sell-off

As it stands right now – and this reflects the knee jerk nature of the price response – markets have an implied probability of 19 basis points of cuts from the Fed by year end. It’s worth noting, that although the Fed was the primary concern for markets last night, econo-watchers were taken aback by some poor US economic data early in the session’s trade, and probably compounded the impacts of the Fed’s “neutral surprise”. US ISM Manufacturing PMI numbers were released, and showed a significant miss: it printed at 52.8, versus expectations of 55.0 – the lowest print of this measure in 2-and-half years.

US earnings lose some of their shine

The Fed, and to a lesser extent the ISM PMI numbers, have taken the steam out of what has been an otherwise solid earnings season. For one, US futures had been priming market participants for a bullish day on the market yesterday, after market bellwether Apple Inc exceeded expectations in their earnings Overall, US earnings have been positive, at least in relation to what has been priced in by the market leading into reporting season. But the little retracement in US equities last night betrays how much this market still relies on cheap money, and favourable discount rates, to sustain itself.

ASX to follow Wall Street

Taking Wall Street’s lead: the ASX 200 ought to shed 30 points this morning. The ASX is in the throes of its own earnings season; and thus far, it too has provided investors plentiful information. But for the index trader, this reporting season centres around the banks, and how their earnings drive bullishness of bearishness in the overall ASX 200. And so far, after the ANZ reported yesterday, the impact has proven the former. Likely owing to a bit of “buy the rumour sell the fact” activity, the financials sector lifted the overall ASX 200 yesterday, adding 30 points to the index.

The banks in the bigger picture

For macro watchers and traders, despite the short-term lift in bank shares yesterday, the question regarding the banks pertains to whether what was revealed could spark a turnaround in trend in their share prices. The answer to this, which will be further illuminated when NAB reports today, isn’t compelling: in the big picture, the banks have traded lower for several years in-line with credit growth and property prices — two things the ANZ in its half-year results said it expects to be a challenge for the bank, and by extension the Australian economy, going forward.


This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.

See an opportunity to trade?

Go long or short on more than 16,000 markets with IG.

Trade CFDs on our award-winning platform, with low spreads on indices, shares, commodities and more.

Live prices on most popular markets

  • Forex
  • Shares
  • Indices
Bid
Offer
Updated
Change
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Bid
Offer
Updated
Change
Bid
Offer
Updated
Change
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

Plan your trading week

Get the week’s market-moving news sent directly to your inbox every Friday. The Week Ahead gives you a full calendar of upcoming economic events, as well as commentary from our expert analysts on the key markets to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.

All trading involves risk and losses can exceed deposits. Trading CFDs may not be suitable for everyone so please ensure that you fully understand the risks involved. All trading involves risk and losses can exceed deposits.