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Central banks on every side of the globe will be front and centre, with markets watching Mario Draghi tonight, Australian monetary policy minutes tomorrow, the highly anticipated FOMC two-day meeting, and to round off the week, Governor Kuroda is speaking on Japan’s current programme.
There is enough market-moving material in those events alone. We know the European Central Bank is returning to a more dovish stance, and expectations are growing for further interest rate cuts and/or increase in liquidity measure that may involve some form of long-term refinancing operation similar to the LTRO loans provided over the last two years.
The RBA meeting this month was (as expected) very ‘neutral’ considering the federal election was three days after. However, the fact that the easing basis had been dropped from the statement means that any signs as to why this was removed will be watched with interest as most economists still believe a Melbourne Cup rate cut is still on the cards. The swaps market is waning on this idea, with the money suggesting there is only a slim chance of a cut on November 5.
However the only thing markets are watching this week is the FOMC meeting; expectations are for tapering to start on Wednesday night and we believe market will tolerate a mild taper of up to $10 billion spread over the mortgage backed securities and treasuries. We are also watching the statement, which should be the blue print for the handling of taper over the next 12 months as the Fed has stated it expects a complete exit of monetary stimulus by mid-2014.
However, the biggest news heading into this meeting isn’t the prospect of taper and a timeline blue print, but the leadership moves at the helm. Lawrence Summers decision to withdraw from the race this morning for the soon-to-be vacated Fed Chairman seat will be met with pronounced optimism. Some had described his possible appointment as one of the two biggest concerns in the macro world. His hawkish views did pose a threat to the timeline of the tapering, with some expecting him to move very quickly to remove it, which would see a very sharp liquidity withdrawal.
However, with his removal from the race, it has become a one-horse race; with Professor Janet Yellen now having one hand on the chair. Her position in the FOMC is one of general dovishness and this news will delight emerging markets and risk markets.
On the opening of the DOW futures, the index has shot up over 100 points. Currency pair have spiked as the USD tanks. AUD/USD punched through 94 cents, USD/JPY dropped below ¥98, EUR/USD touched $1.337 and Cable hit $1.595; its highest level since January. This news is a massive shot in the arm for markets that have seen a drop off in liquidity as investors position themselves ahead of the FOMC meeting. The mass repatriation of funds has cause rapture across the developing market world.
This news is also filtering through to the local equity market and ahead of the open we are now calling the ASX 200 up 44 points to 5263 (+0.84%) – a five year high. This is despite the fact that Japan’s Nikkei is closed for Respect-the-aged Day. This will mean liquidity will be even lower and price action moves could be even more pronounced – movements will be strong and possibly erratic. This light trade should be expected all week, with the Chinese markets only trading for three days with Shanghai closed on Thursday and Friday. Watch for strong price action moves on the lower volumes later in the week.
BHP’s ADR is suggesting the stock will open flat at $36.20, however this call is from Friday’s close in New York and the volume is low. We would expect this cyclical play to shift higher on the news that Summers has withdrawn and it should take the rest of the material sector with it, as well as the energy sector.
It will be a very interesting trading week; investors with their fingers on the pulse of the markets should do very well as risk currencies, markets and bonds shift strongly on a handful of events.