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Tight ranges have been seen in the forex space, as you’d expect, and the USD is now firmly in prime position along with US bonds, with EUR/USD trading in a range of 1.3268 to 1.3256. President Obama’s proposal to rewrite business taxes, with the idea to spur on job creation, has been one of the big talking points on the floor today.
The idea of imposing a 2005-styled HIA (Homeland Investment Act) would spur on strong USD flows, although it is certainly not as straight forward as it seems and of course there is still much water under the bridge until it becomes law. Still, the market is keen to keep an eye on this development and would feed into our stronger USD view over time, helped also by the potential for US fund managers to re-weight asset holdings towards the US.
It’s interesting to see gold move higher through Asia and it’s looking to break the topside of the May downtrend. Expect sellers to be seen at $1347 (the 38.2% retracement of the March to June sell-off and July 23 high), although a daily close above here could see a strong move to the June 6 high of $1423 in the coming weeks. Of course a lot will depend on the slew of data out over the next ten hours or so, and positioning and expectations will also play a major role in price action.
US GDP kicks off play and while consensus stands at 1%, we feel the market is probably positioned for a slightly lower read here. Whether this actually alters the Fed’s mindset is debatable, and although GDP is backwards looking by nature, we still feel the market is putting a reasonable amount of importance on this data point, given aggressiveness of the Fed’s own growth targets are for 2014.
The FOMC meeting (04:00 AEST) is seen more as a transitional meeting and while the possibility of the Fed toning down their view on the economy (given the recent soft patch) is high, traders are looking closely for any change in language with regards to tapering its bond purchases. As things stand, we know Fed chairman Ben Bernanke has highlighted that the committee ‘anticipates that it would be appropriate to moderate the monthly pace of purchases later this year’, However, there is speculation this may be altered to provide just enough colour to portray a more explicit timeframe for when tapering will start. The trade-off for this event, which is potentially USD positive and bond and equity negative, would be a strengthening in its forward guidance. This has been much publicised in the media of late and the markets have reacted; a look at the Fed funds future (maturing June 2015) is now pricing in 52 basis points (bp) of hikes by June 2015, and certainly this has come down a long way from the 74bp of hikes earlier in the month. Expect the chairman to once again stress the difference between a tapering exercise and a rise in the funds rate.
So despite a raft of data releases overnight Asia doesn’t seem too concerned, with the ASX 200 gaining 0.6%, with buying from the outset, rather than just opening with strength due to a positive led. Clearly month-end flows are prevalent and window dressing has helped, and as things stand the ASX 200 is the second best performing market in Asia behind the Shenzhen Composite, putting on near 6.0% in July. When you have the material, energy and financial sectors gaining 10%, 6.8% and 6.3% respectively, and given the weights these sectors have on the broader market, you can see why the ASX is on fire.
The other interesting development is the clear positive correlation we are now seeing between the ASX 200 and the AUD/USD. It seem logical that a falling AUD would be beneficial for the market, however this clearly wasn’t the case during April to June; with both assets classes moving in tandem. It really depends on the reason for the falls in the currency and clearly if the reason is a fall in commodities, concerns of Chinese growth and a stronger USD driven by tapering rhetoric; which in this case it is, then you can see why the stock market fell.
However we are now left with falls in the AUD driven not just by lower terms of trade, but a central bank having to offset tight fiscal policy (at a government level ) and banks keen to promote negative real rates (i.e. adjusting the cash rate for inflation). The fact is the RBA made an indirect mention of this yesterday, by saying the RBA had not reached its limits and was not concerned with asset bubbles. The AUD/USD should continue to trade lower and it seems this will now have positive ramifications on the local stock market.
China has continued where it left yesterday courtesy of some further reassuring words from the ruling Politburo on stabilising growth. Japan has rallied off the lows of 13,644, although the same move hasn’t really been replicated in USD/JPY. Earnings season seems to have gone off ok, although the extent of some of the beats/misses have been amazing. Thus far, 31% of Nikkei companies have reported quarterly earnings, with 54% having beaten on top line, relative to 71% who have beaten on earnings line. EPS growth has increased 58% thus far, with the materials space gaining a meagre 437%!
Europe should see a firmer open, but the calls seem to lack any real conviction at this stage. While most people will be looking at the US, there is also unemployment figures for the eurozone, Germany, Italy and Norway, CPI for the eurozone and Italy, while we also get French consumer spending and Spanish retail sales. ADP private payrolls in the US is another event risk not mentioned earlier and this could provoke revisions to Friday’s non-farm payrolls if it is well outside of the 180,000 consensus. On the earning side, we get numbers from MasterCard, Diageo, Tullow Oil, BAT, BNP Paribas and Bayer. Volkswagen have pre announced, smashing operating income, thus should put points into the DAX on open.