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Equities rally despite Fed tapering

Asia has picked up on the positive US lead and run with it in a move which has many investors wondering if the Santa rally is finally upon us.

The Fed meeting had been tipped as one of the biggest hurdles the market was facing. As a result, price action was choppy at best heading into the Fed decision. Whilst naturally many would have expected the tapering decision to result in a fall in equities, it has not been the case, and it is important to understand why.

Firstly, the Fed reinforced its low Fed funds rate outlook with the key line being ‘it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%’. With inflation remaining benign, the majority of Fed members expect the first rate hike in 2015. Secondly the tapering amount has been deemed by many analysts as a ‘token taper’ and essentially just allows the Fed to test the waters and assess conditions further. Thirdly, the taper has been on the back of rapidly improving conditions while the Fed reinforced that asset purchases are not on a pre-set course and will be adjusted accordingly. On this notion we can only assume that if conditions worsen, the situation will be adjusted accordingly. All things considered, a solid economic improvement for the US will help the global recovery along and ultimately company earnings along with equities.

Japan in focus as the Nikkei approaches 16,000

The resultant FX moves were dominated by US dollar strength which saw risk currencies mostly give up ground whilst USD/JPY rallied to its highest level since October 2008. USD/JPY traded through 104 today and this resulted in big gains for Japanese equities. The Nikkei is among the leaders in the region today and is fast approaching its May high of 15,943. When the Nikkei printed this high in May, USD/JPY traded at a high of 103.74. With that in mind, I wouldn’t be surprised to see the Nikkei test 16,000 in the near term should USD/JPY remain this elevated.  Tomorrow we have the BoJ making a policy statement and they mighty make a comment on the renewed yen weakness to the greenback and the country’s economic progress. There has been plenty of talk around China’s spiking interbank rates which have remained fairly elevated today. The PBoC has sat out of the market and is currently undergoing early stages of liberalisation of the markets. With that in mind then perhaps the current levels aren’t too alarming and the PBoC could easily step in should the situation get out of hand. Markets in China are actually doing fairly well today but are underperforming the rest of the region.   

Europe set to play catch-up

European markets are set to play catch-up to the rest of the world when they reopen today and get their first chance to react to the Fed decision. Most of the major bourses are pointing to gains of 1% plus at the open. There is no major data out of the Eurozone today, but it’ll be interesting to see how the ECB manages the currency going forward. One currency that held its ground fairly well against the greenback was the pound, which remains just shy of 1.64. BoE MPC minutes continued to show optimism on the economy. Retail sales data due out of the UK later today is expected to show a 0.3% rise which is a marked improvement from the previous reading of -0.7%. This could see cable trade back above 1.64. In the US we have unemployment claims, existing home sales and the Philly fed manufacturing index out of the US. Any further signs of strength in the US economy will be positive for the greenback.

AUD weakness lifts the ASX 200

The ASX 200 has been led higher by the materials and energy names today as risk comes back to life. As a result, the market is experiencing a good reversal from the recent slump. The conclusion of the FOMC meeting, along with the weaker AUD, has been key for the gains today. The RBA would have also been cheering the move as AUD/USD dropped below August lows. This will certainly ease pressure on the central bank and government in the near term and they will be hoping to see further tapering in the New Year. Iron ore names have been a standout today, with solid gains for BHP, RIO, FMG and AGO. An increasing number of analysts are adding local iron ore names to their conviction buy lists.

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