Euphoric reaction to Fed meeting

With a week to go to Christmas, Santa seems to have finally arrived for global equities. 

USD
Source: Bloomberg

It is now clear just how nervous investors were heading into the December FOMC meeting and that overhang seems to have been removed for now. It was always important for the Federal Reserve to get the language right so as not to spook markets at such a fragile time and it seems it has done just that. While keeping the phrase 'considerable time’, the Fed altered the tone of its statement by adding that it can be ‘patient’ when deciding when to raise rates – it seems this was enough to keep the hawks at bay.

At the same time the Fed managed to give an optimistic view of the economy describing economic activity as expanding at a moderate pace while underutilisation of labour resources continues to diminish. Going forward, the contentious issue, as far as data is concerned, will be inflation. Essentially, we’ve now moved to a data-dependant approach (as opposed to a timeline reference) and inflation, which continues to run below the committee’s 2% goal, is likely to be the key focus. Oil price weakness is likely to be less of an issue in the medium term, given the Fed feels lower oil prices are a net positive for the economy. As far as rates lift-off is concerned, I don’t think much has changed and the market is still broadly expecting this to kick in around mid-2015. Perhaps the slight downgrade to the Fed funds rate for the 2015-to-2017 period could be construed as less hawkish but it’s important to remember this is likely to be data dependant.

Nikkei leads Asia

Japan is off to the races and is leading the gains in Asia today after USD/JPY reversed sharply on the back of the Fed meeting. Additionally the yen is seeing a bit of weakness heading into tomorrow’s BoJ meeting results and press conference. With Shinzo Abe having secured a landslide victory this week, traders will be cautious about being caught on the wrong side of the yen. The current ‘whatever it takes’ approach makes anything possible from a policy perspective.

Whether this is the beginning of a sustained recovery for Japan remains to be seen but as long as the USD can maintain its upward trajectory, then that’s one step of the way there for the Nikkei. China’s November property prices have predictably shown weakness again and this doesn’t seem like it’ll change anytime soon. After rallying nearly 2% earlier, the ASX 200 has pulled back a touch. It has been a risk-on session with materials and energy sectors leading the way and finally stemming recent underperformance.

Firmer open for Europe

Ahead of the European open we are calling the major bourses significantly higher. Yesterday’s price action was mixed ahead of the Fed and investors will get a chance to react to the results from the meeting. Greece was partly to blame for yesterday’s price action as it failed to elect a new president.

The second vote will be on December 23 and if that fails we’ll have to wait till December 29. The slide in the euro against the greenback was perhaps a highlight with the pair now back below $1.2400. A retest of December lows at $1.2250 could be on the cards in the short term. On the calendar today we have the German Ifo business climate and the EU economic summit. Russia will also remain an issue as the ruble continues to experience some volatility. In the UK, we have retail sales while in the US we have unemployment claims and the Philly Fed manufacturing index.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.