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To clarify where we see the FOMC heading, we are in the September camp when it comes to tapering. That leads us to expect a very slick, highly rehearsed, toeing-the-line testimonial statement from Ben Bernanke tomorrow morning. There will be no misinterpretation, no inferred meaning and a very clear picture of how the Fed will handle the next six months particularly.
How will this impact the Asian region? It will take one volatility rudder out of the muddy waters. Since Ben Bernanke’s May 22 ‘could’ slip of the tongue - the ASX has lost 366 points, the AUD has dropped 2.93% and the Nikkei has lost 2340 points (admittedly the BoJ has also been a major influence as well and is seen as the second volatility rudder).
So what will this mean for the ASX? Clear air is the major point.
The repatriation of the freely available money from the Fed has seen foreign investors cashing out on the May 22 comments. Plus, the further the AUD fell, the faster the selling gathered as profit took a double hit from a falling price and a falling currency.
So, if investors get a completely clear picture of where the FOMC is heading, bargain hunting is on. We have already seen the banks having a small rally since falling in the vicinity of 20% in USD terms and they do appear attractive from this kind of valuation. It could also be the trigger for the winter rally we predicted at the start of the month.
We have stated several times that the last four to five week is complete déjà vu. For the last three years the ASX has had a massive correction at the start of winter before rallying all the way to then end of the year and each time the winter rally has had a trigger. Whether it was plugging the holes in the leaky boat that was Greece, a ‘whatever it takes’ to stabilise the eurozone speech or global action against the GFC - tomorrow morning’s FOMC meeting has that feel about it.
So positioning today will be key; banks are likely to see rises as are the financial services sectors with stable earning streams. The cyclical plays should also see support having seen sustained selling to levels that were snapped up in late April.
We support this long view however add caution to the trade; if the Fed should surprise the market with tapering talk, all bets are off. The current winter trend of the last three years will be broken and the wild ride south will accelerate. What most forget to remember about the US markets is that they have been in a bull market since 2009; a pull-back and even a correction would be healthy. The ASX on the other hand would see another year wasted and may even struggle to find itself back in the green come December.
Getting stock specific, New News Corp (NNC) and NWS start trading today. There has been a slight confusion regarding when the official trading day would start, but today is the day. NNC will take the digital, print and some good growth aspects of pay TV in the spin-out and will also be backstopped by a US$500 million buyback which will provide support. NWS will become 21th Century Fox and will take complete control of the TV and movie assets. The penetration pay TV, which is gaining in the market, will see NWS generating good growth profits over the coming years and we see both as the best performers in the media space over the coming months.
Ahead of the open today, we are calling the ASX 200 up a solid 37 points to 4836 (+0.2%). BHP’s ADR is suggesting the security will add 32 cents to be up +0.97% to $33.01 as the iron ore price continues to move higher up 2.35% to US$117.7 a tonne.
Watch for possible repositioning in the afternoon as investors weigh the possibility of a more hawkish view from the Fed, however overall today should see positive moves.