Markets discount hawkish Fed comments

Markets continue to trade in an eerily low-volume low-volatility dog days of Northern hemisphere summer.

Jackson Hole
Source: Bloomberg

Stocks and bonds trading at historically high valuations is seeing a steady push of capital into the higher risk premium ends of the market.

After surging higher off the comments from the Fed’s Stanley Fischer, the DXY US dollar rally entirely reversed overnight pulling back to almost exactly where it started the session. And a similar pattern was seen in most of the major USD crosses. The Aussie dollar edged up slightly higher by 0.1% to US$0.7632 after dropping to US$0.7584 at one point in overnight trade. US treasuries had even more conviction, totally discounting the threat of an imminent rate rise and continuing to rally with 30-year yields dropping by 4.9 basis points and the TLT iShares 20+ Year ETF gained 0.8%.

DXY
Click to enlarge

It’s still early days yet for the Jackson Hole conference, and the main event will be Janet Yellen’s speech on Friday. But the markets seem to be already discounting the possibility that Yellen may look to talk up a September rate hike. It seems that it would require a quite noticeably more hawkish Yellen speech than we’ve seen in a long time to stop the US dollar selling off and US bonds continuing to rally on Friday, and that support line of 94 should be watched carefully this week.

Commodities did not bounce back despite the US dollar paring back its gains. Silver saw a big pullback losing 2.3%, while gold lost 0.2%. Copper also lost 1.2%. There is the prospect of a bounce back in oil output from Nigeria after the Niger Delta Avengers agreed to stop attacking oil facilities. While the Iraqi government deal to resume oil exports from the Kurdish controlled Kirkuk region could see their exports rise by 5%. The combination of a stronger US dollar and the prospects of a surge in oil output saw WTI oil decline by 3%.

The ASX is looking set to open higher despite the fact that both BHP’s and CBA’s ADRs closed down in the US session. The pullback in the US dollar may help some of the materials stocks if commodity spot prices start to pick up in the Asian session.

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