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Perhaps this has been a reflection of the efficient re-pricing of asset classes after the Fed’s uber-dovish stance. Maybe it’s a reflection that the Fed are keeping the balance sheet constant, because of the fiscal issues of which we are seeing front and centre today, with the House set to vote today on stopgap measures linked to Obamacare defunding. Clearly the potential government shutdown is holding the bulls back despite monetary conditions positive for a further rip higher in equities. The overnight rise in yields probably didn’t help either.
We have seen no expression of concern from clients at all around the German elections. EUR/USD looks heavy on moves to the high 1.35 level though, but that is more a reflection of a move higher in US treasury yields after the solid Philli Fed survey, existing home sales and leading indicators. The market sees the election really going one of two ways; either the status quo is resumed (i.e. CDU, CSU and FDP remain in power) or perhaps a grand coalition with the SPD party is put together after a short period of negotiations. Given the SPD‘s previous positive stance on backing a redemption fund, backed by Eurobonds, if they did help govern in future we could see a spike in EUR/USD on the prospect of a more euro-friendly government in place. On the other hand if the AfD (right wing, anti-euro party) get over 5% of votes and thus gain representation in parliament, we could see EUR and US futures gap lower on Monday.
Eurozone concerns have had limited influence on price action of late, but the prospect of having the AfD party having representation in parliament could have implications on eurozone policy going forward. The first thing that springs to mind is Greece. We know the Greeks have a funding problem; the IMF talked openly about it July; highlighting a €4.4 billion funding gap in its current program for 2014 and €6.5 billion in 2015. Given all new loans have to be fully agreed on in the Bundestag (German lower house of parliament); AfD representation in parliament could cause disruptions and uncertainty here.
Going back to the topic of the Fed’s September meeting, clearly traders will be looking forward to the minutes on October 10, although on the October 4 we get the non-farm payrolls and if the Fed are ever going to taper we need to see a number closer to 200,000. In US trade today we get speeches from Ester George (an uber-hawk and current voter), Daniel Tarullo (voter), James Bullard (and major dove and voter) and Narayana Kocherlakota (a voter in 2014) and traders will be keen to hear what they have to say about the FOMC meeting, although we currently have a descent idea of how they are positioned already with regards to a dovish/hawkish stance. Then on Monday we get narrative from Dennis Lockhart and Bill Dudley. Bill Dudley’s comments are especially important as he is right at the Fed’s core, being a permanent voter and having a stance closely aligned to that of Janet Yellen and Ben Bernanke.
Moves in emerging market (EM) assets were extremely strong yesterday, but traders are saying perhaps they were overdone, with the Indonesian Rupiah and Indian Rupee falling 1.4 and 0.6% respectively. AUD/USD has seen some tepid buying after reaching a low of 0.9423 yesterday and given the current technical and macro picture we feel pullbacks continue to present themselves as buying opportunities in the short-term, while a daily close above 0.9510 would see us look to add to any longs. Many feel the Feds actions are in some way a quasi-stimulus to EM and in that regard it is AUD positive, as stability in EM currencies means corresponding central banks don’t have to top up depleted USD reserves through selling of AUD/USD, EUR/USD and GBP/USD.
US futures are down a touch, but not really giving too much away as things stand which is a testament to the indecision in Asia, with a 0.4% fall in the ASX 200, 0.2% gain in the Nikkei and 0.4% rally in the Kospi. European markets look to open modestly lower and looking at sector leads from the ASX 200 materials names in Europe could see some downside, given the 1.2% fall in the ASX 200 material sub-sector.
Data is relatively light in upcoming European trade, with UK public sector net borrowing, eurozone consumer confidence and Canadian CPI the focus. It seems logical therefore to keep an eye on narrative from the four Fed members, who could throw some light on why markets were simply not positioned for the September meeting.