Global markets on Fed watch

Asia has got off to a positive start to the week as the momentum in equities continues to build with the various puts set by policymakers underpinning sentiment.

US Federal Reserve
Source: Bloomberg

Not many would have imagined a situation where the Fed removes the ‘patient’ reference, yet the US dollar weakens and equities rise. It almost seems the Fed has been the missing part of the puzzle in this global easing jigsaw and that piece now appears to be falling into place. The dominant theme though has been centred on fx moves with the US dollar remaining front and centre. There has been renewed greenback weakness with focus now switching to fedspeak after last week’s FOMC meeting. A couple of fed members spoke including Dennis Lockhart who said he expects the Fed to tighten at either the June, July or September meeting. Meanwhile, Charles Evans is happy with the decision to take a data dependant approach and favours a 2016 lift-off. The fedspeak will continue later today with vice chair Stanley Fischer, Loretta Mester and John Williams all set to hit the wires. This will certainly cause some choppy trading for the greenback as various members give their opinion on rates going forward. Remember, Fischer was one of the biggest advocates of the switch to data dependence and it’s clear he is exerting quite a bit of influence on the committee. Apart from fedspeak, focus will also be on US February CPI, particularly given inflation has been flagged as a key for how policy progresses through the year.

Lofty valuations in China

Looking around the region, the ASX 200 has been an underperformer today, while Chinese equities are outperforming. Data is limited in Australia but out of China we have the HSBC manufacturing PMIs due out on Tuesday. We also have company profits data which has actually been going in the opposite direction to equities. With corporate profits shrinking and other asset classes like property looking increasingly unattractive, investors are speculating on equities and this is causing some lofty valuations. In fact, 20% of the companies on the Shanghai Composite have PE’s of over 100 which is quite alarming. Excessive speculation in equities has been rife in China and it’ll be interesting to see how investors respond to reforms and more conservative growth. The ASX 200 traded as high as 5995 this morning and everyone is keeping an eye on the 6,000 barrier. There is some nervous trading at these levels but dips will continue to be supported by investors. The hunger for yield continues to prevail and Premier Investments has been the latest company to be rewarded after announcing a special dividend on top of its interim dividend. For miners and energy plays, it is clear that unless you offer yield, the going is getting tough and investors are reluctant to dive in. Commodity prices continue to be between a rock and a hard place leaving resource names to engage in aggressive cost cutting in a bid to maintain profitability. AUD/USD has continued to consolidate and the moves have been primarily driven by the USD side of the equation. There isn’t much on the local calendar this week but perhaps the RBA’s semi-annual financial stability review will bring fresh insight on the RBA’s latest assessment of the property market.

Firmer open for Europe

Ahead of the European open we are calling the major bourses mildly firmer with limited data on the calendar to start the week. With the DAX above 12,000, FTSE above 7,000 and CAC above 5,000, there is a new sense of optimism in Europe. ECB President Mario Draghi is testifying on monetary policy in front of the European Parliament’s Economic and Monetary Affairs Committee. Given all the measures that have been introduced by the ECB and signs of bottoming in data, there is a good chance Mr Draghi will give a more upbeat assessment of the economy. Additionally, we have a raft of manufacturing and services PMIs this week of which the market will be looking for further improvement. Recent stimulus measures and a weaker single currency are expected to have helped support the economy. There seems to have been some progress on the Greece front with positive commentary from Greek Prime Minister Alexis Tsipras and Angela Merkel sounding a constructive tone. EUR/USD has been in a downtrend channel since December and remains intact with the pair testing the top end of that channel. Traders are more likely to be looking for fresh selling opportunities in the pair.

Click to enlarge

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.