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- Strong bounce in US futures
- Janet Yellen nomination in focus
- Japan outperforming Asia
Equities lost further ground with US markets hitting new one-month lows as the US government shutdown rolls on. With US equities still so close to all-time highs, there is always a risk we will see profit taking accelerate the longer this political impasse lasts.
There is also stress building up in the T-bill market, while the VIX spiked above 20. While the political impasse has failed to show any solid signs of progress, reports suggesting President Obama is set to announce Janet Yellen’s nomination for the Fed chief role as early as tomorrow has certainly caused some volatility in markets. This news has also been supported by the price action as the S&P tests a key uptrend support line which has been in place since November 17 2012. Reports of Janet Yellen’s nomination saw the USD lose ground to risk currencies like the AUD, EUR and GBP. While Janet Yellen’s nomination was already mostly priced into the market, it certainly does momentarily take the investment community’s mind off the government shutdown.
Janet Yellen nomination in focus
She is currently vice chair of the Fed and perhaps this piece of news might distract risk sellers from the fiscal situation momentarily. These reports are also quite timely considering the FOMC meeting minutes from the last Fed meeting are set to be released. These minutes are from the meeting which produced the surprise decision not to taper, and the market will be looking for more clarity on tapering and use of forward guidance. Fed member Charles Evans will also be on the wires and pressure will be mounting for him to comment on the Janet Yellen situation.
The market goes into the minutes short USDs and thus narrative that suggests the view to taper is a close one could push the USD higher. The probability of tapering in the December meeting is falling by the day, and at present I say it is around one in three. As a result, the next 24 hours will be crucial for the USD and is likely to set the tone for the FX space.
European markets are facing a modestly weaker open mainly due to the sharp drop in US trade. We’ve seen these calls improve along with the recovery in US futures through Asian trade. The European economic calendar is fairly quiet today, with just German industrial production on the docket. ECB President Mario Draghi’s is set to make a speech in which traders will be looking for clues on his recent change in tone around further easing. In the UK we have manufacturing production, trade balance, industrial production and a BoE credit conditions survey due out.
Japan outperforming Asia
Taking a closer look at equities in Asia, Japan’s Nikkei is outperforming the region after USD/JPY regained its footing and pushed above 97.20. This move was primarily pinned to Janet Yellen’s nomination, which took some steam out of the safe-haven trade. The rest of the region is mixed with the Shanghai Composite flat, the ASX 200 mildly firmer and the Hang Seng down 0.7%.
In Australia the materials sector is leading the recovery with gains for BHP Billiton, Fortescue and Newcrest. Among the big four banks, only one is in positive territory. Downside to negative local economic releases has been limited with this morning’s Westpac consumer sentiment not quite showing the positive momentum we saw in the ANZ job ads and NAB business confidence readings. Tomorrow’s jobs data has been pinned as the most important release of the week for the local currency, but I remain of the opinion that the 0.93 to 0.95 range will hold.