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New York Fed president Bill Dudley and Atlanta Fed president Dennis Lockhart were both on message with the Chairman stating that the economy still needs monetary stimulus and that the decision not to taper was the right one.
Then in the same three hour period, Dallas Fed president Richard Fisher said the central bank had damaged its credibility with the decision, that trust has been broken between the markets and Fed, and that the miscommunication is now a real risk. ‘Miscommunication’ is becoming the operative word.
What is clear is markets are struggling to head higher for a reason; the US and parts of Europe have hit or are hitting record highs. The run has been well supported and the more steam it has gathered the more it has sucked in funds from underperforming sources such as money markets and bond markets.
The currencies are as volatile as ever, leaving the equity markets to take up the slack. What is becoming apparent is how overvalued they have become. Investors are asking, what is the foundation of the current rally? Earnings season was only a pass mark and when compared to forward earnings the differential is stark.
Consolidation does look appropriate; AUD has again gone in the opposite direction to where the RBA wishes it to go, and this will impact companies that derivate income from exports or derivate earning in USDs. It is going to be tough for these part of the local market (healthcare, parts of the media and material plays) to drive higher under current conditions.
If the Fed does continue to hold the line on the $85 billion monthly purchases the AUD and the local market will find support for the wrong reasons; earnings are not supporting current levels and with China adding more support to the ‘stability’ call with a solid HSBC print yesterday, the AUD has a real possibility of overheating.
Ahead of the open we are calling the ASX 200 down 20 points to 5232 (-0.38%) as the local market follows the US markets lower. With Japan and hopefully Hong Kong back online, volumes should return to some form of normality and with both playing catch up this may accelerate today’s contraction.
BHP’s ADR is suggesting the stock will drop another 39 cents to $35.75 (-1.08%) again on the back of trade in the US.
Trade today will be going it alone with no macro news due until 18:00 AEST tonight; with the release of the German Ifo Business climate meaning momentum should dominate trade and won’t be interrupted.