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The S&P 500 and Dow Jones both fell 0.6% overnight as US Federal Reserve 'taper fear' rose. This is slightly counter-intuitive though, because tapering is a 'known known'.
The reason it’s being reported is that Dallas Fed president Richard Fischer last night said ‘the Fed was closer to slowing bond purchases and warned investors not to rely on stimulus’. While Atlanta Fed president Dennis Lockhart stated that if current employment trends and economic growth projection hold true, the ‘removal’ of asset purchases by the Fed should processed.
Again these views are 'known knowns' – the Fed has made it clear that tapering will happen and that the complete cessation of monetary stimulus is expected by mid-2014. Bu the moves last night are not just down to these news headlines.
One other factor that will put last night’s US trade in perspective, volume turnover of $4.35 billion is the lowest booking of the year. It is the start of August and typically this is one of the quietest trading months of the year in the US. Investors and traders alike are taking well-earned holidays. It is also the end of earnings season in the US, most bottom-up views are now factored into share prices and markets will now bunker down until the next quarterly news due out in mid-September. This will mean macro news will move markets more than usual over the coming month, as volume will be light with investors away from their desks.
Here in Australia, earnings season is just kicking off. Yesterday saw DOW and COH producing mixed results. What was clear at the close of business; guidance looks to be key. DOW’s FY13 results were solid but FY14 looks to be rocky. COH’s FY13 results were slightly weaker than forecast, but FY14 guidance was slightly rosier than expected. DOW finished in the red, COH in the green. Will this be the trend for the next month?
Something that may cause some slight optimism for material plays over the coming days is the release of China trade balance. The reasoning for the slight optimism is the correlation between Taiwanese and Chinese exports. The two trade very closely, with the Taiwanese results being a leading indicator for Chinese exports. What we have seen since June is an uptick in exports from Taiwan; if the correlation holds true expectations are for a net positive on the export side – something that should add support to the Australian material plays heading into earning releases.
Moving to the open, we are calling the ASX 200 down 18 points to 5087 (-0.35%) as it follows the US global lead. Earnings season continues this morning, with FOX and Flexigroup releasing full-year figures. Tomorrow sees Telstra and RIO which will really get the ball rolling.
The drop in US trade and taper fears saw a negative impact on commodities, barring oil. This has led to a drop in BHP’s ADR, which is suggesting the stock should contract by 40 cents today to $35.22 (-1.12%) even though iron jumped back up towards two-month highs of $131.40 per tonne.