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After a pick-up in volatility early last week, we have seen signs of calmer heads prevailing and price action showing signs of consolidation.

  • On Friday, economic data centered on US core CPI, which increased 2.3% year-on-year, relative to expectations of 2.2%. This resulted in US two-year treasury yields pushing up four basis points. The prospect of a hike from the US Federal Reserve (Fed) in 2016 has increased six percentage points to 55%.
  • With the exception of two instances in 1994, the Fed have never raised rates without the market pricing in at least 70% chance of a move. Keep in mind in 1994 we saw one of the most volatile years in the bond market ever. The Fed will need to continue guiding the market if they want to hike rates this year.
  • On the back of the losses for shorter maturity bonds, we saw the USD index gain 0.9%, for the biggest one-day gain since late June. Technically, the USD is looking quite attractive and threatening to break the multi-month downtrend drawn from the December high. If one is to add USD strength to a rise in libor and US treasury yields, and you have a tightening of financial conditions, why would the Fed need to hike?
  • The S&P 500 fell 0.4% with the index continuing to consolidate after the break of the July to August trading range on 9 September. The two levels worth watching this week will be 2116 (the 38.2% retracement of the June to August rally) and 2177 (last Friday's gap lower). This should define the trading bias if either levels are broken. Let the market push your trading bias, and until then, a neutral view is warranted.
  • The German DAX is looking vulnerable with much focus on moves in Deutsche Bank and to a lesser extent Commerzbank. Deutsche fell 8.5% on Friday after the US Department of Justice issued a $14 billion fine. Deutsche has been off the radars for a while, but the share price is approaching the 3 August lows of €11.06 and many are concerned of recapitalisation. There has been discussion over the weekend about their derivative exposure, which some feel makes them the most important bank from a systemic perspective.
  • The ASX 200 is likely to open unchanged at 5296 and traders will be asking if we will see a sixth consecutive week of losses. BHP and CBA are likely to open on a flat note (based on their ADRs) and with the event risk unfolding this week, one would expect traders to shy away from any outrageous bets today.
  • Technically, I want to see a closing break of 5315 to become more bullish on the market. From a technical and price action perspective it promises to be an important session today.
  • AUD/USD has opened the new week on a flat note with limited weekend news and with US politics really at the heart of the news flow. On the week, I will turn more bullish as a short-term trade on a break above the 12 September high of $0.7567, while a close through $0.7450 should encourage short positions. Just like we are seeing in the S&P 500 traders need answers and we are seeing consolidation in price.
  • The Japanese equity market will be shut today for Respect for the Aged Day, although futures markets will still be open. Wednesday’s Bank of Japan (BoJ) meeting could actually be the event that spurs the greatest volatility, not just in Japanese assets but across other geographies as well. One focal point will be whether they take the deposit rate deeper in negative territory. Of 40 economists surveyed by Bloomberg, one is expecting the BoJ to lower the deposit rate to -40bp (from -10bp), with two to -30bp and 11 to -20bp. This could have big implications on Japanese assets.
  • A failure from the BoJ to live up to expectations could have far reaching implications for a market that has increasing concerns about the BoJ’s credibility.

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