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The fact the grey clouds that are China and Greece have cleared slightly only brings a sharper focus on the biggest macro cloud of 2015 – Fed lift off.
Yellen’s testimony to Congress
‘Economic conditions would likely make it appropriate at some point this year to raise the federal funds target rate’.
She admitted that ‘there is still some slack in labour markets" and the data was only showing ‘tentative signs’ of a pick-up in wage growth.
However, the statement also pointed to the fact ‘monthly inflation readings have firmed lately’,
The strength in the USD reiterates our view that one rate hike is due for 2015.
The strength in the past few days suggests the market was short a September lift-off. That gap is rapidly closing.
Analysts are still divided between September and December. The majority is to September but not by a significant margin.
From what we see, her testimony to Congress is very consistent with Fed speak from the past three months. There isn’t anything significantly new; it was more that the market has been star-gazing at Greece and China with the idea it would slow the Fed down.
Greece looms large
The market clearly expects the Greek parliament to pass the eurozone’s agreed measures from Monday. The calmness from European trading is almost eerie.
For those counting, 151 yes votes are needed to pass the legislation (50% plus one)
The vote is for the major priorities demanded by the EU:
- Streamlining VAT and broadening of the tax base to increase revenue
- Upfront reform measures to pensions
- Improvements to the long-term sustainability of the pension scheme
- Implementation of the provision of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union.
The vote is due at 8am (AEST) and under Article 109 of the Rules of the Parliament, the discussions for urgent bills can't take more than 10 hours so this is the cut off to start voting.
All sell-side analysts see a YES vote and the bill passing. However, they were also unanimous about the previous package that Tsipras took to a referendum.
Ahead of the Australian open
We are currently calling the ASX up a further 11 points to 5647 – The ASX has been the strongest developed market in the region in the past three days. The underperformance does give favour to the ASX outperforming in July.
Historically, July is the strongest month of the year, averaging a 3.9% rise over the past four years. Earnings season is fast approaching and the pessimism among analysts is as high as it has been since the GFC. That pessimism may actually give the ASX its best chance of outperforming.
In short, the current strategy is: vigilance on the macro outlook with a bottom-up surprise a likely scenario.