Equities rally ahead of the FOMC meeting

While we wait for the days to pass and the FOMC meeting to approach, equities rallied, the dollar retreated and yields on 10-year notes dropped to 2.86%.

The main reasons have been Larry Summers and Syria. There is an undercurrent that perhaps the Fed will not taper in September considering the US economic data points coming up to this week have been underwhelming.

There are assumptions built into this rally masking the relief that market participants feel if liquidity is here to stay. Emerging Asian equity markets such as the Jakarta Composite, which suffered a 22.4% drop from its peak on 21 May to the low on 28 August, have since recovered 12%.

The Nifty, which lost 14% during the same period of the Asian sell off, has almost recovered all its losses with a 10.5% recovery. The structural reason for the exit from these markets has been pushed aside in the past few weeks with a return of capital inflows seeking undervalued risky assets in the chase for yield.

Outperformers

This has resulted in the emerging Asian equity markets outperforming developed market equities this month. Emerging Asian currencies have staged a recovery, with the rupee bouncing back with a 10.15% gain from 28 August, followed by the ringgit with a 2.9% gain and the peso with 2.52%.

Also leading global equity markets and major currencies higher is the perception that Dr Yellen, the next favourite contender of the Fed Chair, will be more dovish, and that stimulus will be here to stay. The are two assumptions which will be debated if the Fed decides not to start the tapering process this year and the next Fed Chair is not announced soon.

Firstly, it’s assumed that Dr Janet Yellen will be named as the next Fed Chair and secondly, she will be as dovish as the market thinks she is. There is a further assumption that the Obama Administration is not enthusiastic about her and if the Fed does start a tapering timeline, it is unlikely whoever takes over will change the policy.

Progress in Syria

As the international community views the diplomatic talks on the Syrian issue as progress, the Syrians view it as a stalling tactic, giving President Assad a further boost as a clever negotiator in foreign policy, and hailing him as a survivor. The United Nations inspectors found convincing evidence that sarin was used during the attack in August near Damascus. Oil and gold declined further as the risk of military strikes was further removed.

US crude failed to break through to higher levels, and is trapped in a range as domestic stockpiles are expected to have declined ahead of the EIA report tomorrow.

Brent prices are most likely consolidating further with Libya restoring 25% of its supply and a lack of further catalyst on the upside.

Gold is on a downward momentum with a test of support level $1300 seen as possible.

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