Three headed attack on US markets

US markets were sold off reasonably aggressively, at least in terms of the percentage move rather than actual volume of shares traded.

The moves came on the back more concerns around the October debt ceiling debate, poor trading statistics from Caterpillar and confusion over US monetary policy.

The Federal Reserve would have certainly welcomed the moves lower in bond yields after last week’s FOMC meeting, however where they end up by the end of this week will be of key interest. The Fed funds future (June 2015) seems to have found somewhat of a market sweet spot; pricing in 54 basis points of tightening by June 2015 and effectively not moving from this level in the last three days. In theory this is still a touch aggressive given the Fed won’t raise rates until unemployment is ‘considerably’ below 6%, which would coincide with full-employment. The St Louis Fed president has changed opinion again and when the most dovish member of the Fed talks about potentially tapering in October, we listen.

We get the impression that a solid non-farm payrolls report on 4 October, similar levels in the weekly jobless claims, a resolution in the debt ceiling (albeit probably at the last minute) and bond yields remaining around 2.70%, could provoke a token cut as Mr Bullard alluded to for the upcoming 31 October meeting. This should keep rallies in EUR/USD, GBP/USD and AUD/USD contained from here and while there are a lot of ‘ifs’ involved, data is clearly the key driver.

Euro trade spiked at possible outright majority

Asian flows have been subdued again, as you’d expect given Japan are offline, while the Hong Kong market was also partially shut. The EUR saw strong upside in early interbank trade, although settled down in many cases against its G10 peers coming back to Friday’s close. Markets were initially excited that the CDU/CSU party would get over 300 seats and therefore command an outright majority, for the first time since 1957. However it wasn’t to be and the party missed out by whisker. The process of negotiating with the opposition SPD is underway, however this shouldn’t herald any nasty surprises and Germany should end up with a stable pro-European government after an extended period of shaping the cabinet. Of course, with Troika reviews of Greece and Portugal in the coming months, the make-up of the German parliament is important and therefore its positive that the anti-euro AfD party won’t have representation in the lower house, which is critical given the potential future votes on any new assistance for its less fiscally prudent EMU partners.

China shows progress

China has rallied on further signs of economic progress, with the HSBC manufacturing PMI print continuing its path of expansion, easily beating expectations at 51.2 (a six month high). The equity market was playing catch-up to moves in other global bourses, but as we have seen time and time again this market beats to its own drum and therefore todays flash PMI print has been the overriding driver. The ASX 200 and AUD/USD responded as you’d expect on this print, coming nicely off the lows, with AUD/USD hitting high of 0.9438, from 0.9405 before the data. In the last couple of trading sessions there have been good levels of supply at 0.9438. It is also worth noting that AUD/NZD traded twelve pips from the August 1 low of 1.1200 and momentum traders will be looking to add to shorts on a close below this pivot.

Aussie market remains steady

The ASX 200 is down 0.6%, having traded as low as 5227. Selling has been broad-based across the sectors, although the discretionary space is holding up OK. The index is oscillating around the 15 May high of 5249.6 and a close below this pivot could see a move to the 22 August uptrend support at 5200, for a deeper move to 5045. Overall we remain constructive on the equity market, especially given the Fed’s dovish actions. However fund managers are finding it harder and harder to find value, with the ASX 200 currently trading on 15.39x consensus forward earnings, which is still below the 16x multiple it was trading on in May, but 14.4% above the five-year average.

In Europe one suspects the DAX will be the most talked about market today and our client flows have largely been aimed at this market. Interestingly, it is the only market we are calling up on the open, despite the index rallying 2.6% last week; the star performer in Europe. On the data side we get services and manufacturing revisions from France, Germany and eurozone composite and once again the trend of improving data is likely to continue. We also get to hear from Mario Draghi in the European parliament, in what will be an extremely busy week for central bankers. We count eleven different speeches from ECB members and eleven from various members of the Fed, although in a number of cases the same individual will speak twice. We also have the Senate vote on the Republican proposal last week, which has already been dismissed in its current form, thus with all this in mind, volatility could increase this week.

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