Firstly, on a purely FX note, it’s been a big night for the CAD, with USD/CAD trading down to C$1.2679, although now resides at C$1.2735 (-1.5%) at the time of writing. AUD/CAD is down 0.9%, but naturally, it would be down more if it weren’t for the AUD looking relatively strong with AUD/USD hitting a high of $0.7686 and completely overlooking the 2.1% fall in spot iron ore and 1.8% drop in iron ore futures.
The Bank of Canada lifting rate by 25 basis points for the first time since 2010 was priced in, and while Governor Poloz struck a cautionary tone he has started what the market feels is the platform for a cycle of interest rate hikes over time, albeit slowly. Rallies in USD/CAD are to be sold it seems, although we may need to see US crude working into and above $50 here.
The USD itself has seen little in the way of moves on the session, but still trades with a heavy tone. Federal Reserve Chair Janet Yellen gave us very little new information, which to be fair shouldn’t surprise either and it's clear the Fed as a collective will be paying close attention to Fridays CPI print (due 10:30pm AEST). Recent speeches from Fed Governor Lael Brainard and Philadelphia Federal Reserve Bank President Patrick Harker (a voter and a known hawk) have given traders reason to reassess the outlook for a December rate hike, with fairly cautionary commentary this week and the probability of a hike in December has swung to a coin toss outcome. Yellen did mention that the Fed’s balance sheet could start to fall 'relatively soon', as its various assets mature and a specific level of proceeds are not reinvested. So anyone expecting this 'normalisation' to start in the very near-term has probably changed their call and September still seems most likely.
Lael Brainard’s comments (out on Tuesday) that the natural real Fed funds rate is close to zero seem highly important. With the Fed funds effective rate at 1.16% and core PCE at 1.4%, the real Fed funds rate sits at -24 bp. This suggests to me Brainard really only sees one more hike (presumably in December if data permits) before we get to levels where the key US interest rate suits economic activity. It does not bode well for those expecting US fixed income to sell off aggressively from here and the US 10-year treasury (by way of example) heading towards 3%.
In terms of identifying and mentioning lofty asset valuations, we certainly didn’t learn much from Janet Yellen here either, with the market keen to explore the notion from the June FOMC minutes that a few participants held a view that asset prices were 'overvalued'. Yellen mentioned that the Committee tries not to provide an opinion here. So moving on from Yellen, although we do get round two of her Congressional hearing tonight to the Senate, it’s probably also worth pointing out that the Fed’s Beige Book was fairly upbeat reporting activity expanded across all districts in June, with growth varying from slight to moderate.
We still have a favourable backdrop for equity appreciation, with still-accommodative monetary policy settings, that despite the recent back-up in longer term yields, is still going to be accommodative for some time and the global economy continues to improve and perform fairly well. Of course, we can’t forget earnings too and the market is clearly telling us that they expect the consensus of 7% Q2 EPS growth for the S&P 500 corporations to perhaps be closer to 9-10%. Certainly, US equities have provided Asia with a platform to progress, with the S&P 500 closing up 0.8% and the NASDAQ up over 1%, so tech looks good here.
Our call for the open of the ASX 200 sits back just above 5700, with SPI futures putting on 27 points in the night session. Japan should open a touch higher, despite an unconvincing move from USD/JPY, with the pair looking for buyers to really step in at ¥113.00. The market that seeing the strongest upside momentum of late though is the Hang Seng, which is eyeing a stronger open as well and the way things are shaping up we could be seeing that index targeting the 2015 high of 28,000 in Q3.
By way of strength in the ASX 200 itself watch the banks today, with Goldman Sachs upgrading WBC to a ‘buy’ (they say macro-prudential impact is being too heavily discounted), while CBA has been cut to neutral. We shall see if this influences, but Goldman’s always seems to get a bit more airtime in its calls than other houses. So banks are key though for the market, as we saw yesterdays with financial taking out the large majority of points. Energy stocks should find buyers, with Brent and US crude moving higher, with a sizeable 7.6 million barrel draw in US crude inventories. Perhaps some disappointment has been seen with the Nigerian oil minister saying Nigeria has 'no time frame to enter the OPEC production cut agreement'.
Keep an eye on China’s trade data (no set time), which could be a catalyst for the AUD and commodity players, but we have seen a nice trend in real imports and exports of late and we have reason to feel this changes. We get China’s Q2 GDP next week, so this data point may impact this, but as it stands a Q2 (yoy) growth rate of 6.8% seems likely.