Strategist views remain unchanged on tapering

The bond market will tell you that Ben Bernanke was slightly more dovish than expected, with the ten-year treasury trading below the 21-day moving average at 2.53%, after being above the short-term average for the last 50 days.

A move to support around 2.41% can’t be ruled out, although it is all about the data from here, with the Fed chairman making that point pretty clear.

Most strategists won’t have changed their view on when tapering will begin based on yesterday’s narrative from Ben Bernanke, nor will they when he speaks again today, this time in front of Congress. The Fed chairman was keen to point out that changes in policy were ‘changing the mix’, as opposed to the level of absolute accommodation; therefore it seems logical to us that when the Fed does slow the pace of buying, it may neutralise the tapering effect by beefing up its forward guidance. On this ground some of the headway the USD would have made, (presumably as yields rose) has been taken away, and thus the likelihood of range trading in EUR/USD, GBP/USD and AUD/USD has increased. We would play 1.3050 to 1.3200 in the short term, and while we are longer-term USD bulls (like everyone else), it seems this could be the way to go, unless the US data shows sharp improvement. It’s worth highlighting that while Ben Bernanke was the main game in town, June building approvals and housing starts were poor, highlighting that we are seeing some softer data. In upcoming trade the market will be keen to look out for US leading indicators, weekly claims and the Philli Fed today.

With the market now extremely tired of the tapering debate, we now wait for ECB member Joerg Asmussen who is due to speak in early European trade. Recall we have already heard from him in recent times with regards to forward guidance, saying ‘it’s not six months, it’s not twelve months, it goes beyond’. This topic of forward guidance from the Europeans has been relatively comical with Mr Asmussen’s comments quickly retracted. We have also heard comments from none other than Mr Draghi, Mr Cœuré and Mr Liikanen of late, but Mr Asmussen’s have been firmly on the dovish side suggesting policy would remain expansive,  although with all this in mind the ECB should really back this up with actions at some stage. Perhaps a new LTRO (Long-term refinancing operation) or cut to its refinancing rate would be a start, as merely using rhetoric to try and separate moves in peripheral debt and the German bund market from that of the US bond market will only last so long.

Asia has once again been subdued and clearly volatility is not as prevalent as it was a month or so ago. China is the underperformer, with property names under pressure, certainly not helped by another strong rise in home prices. 69 of 70 cities gained, with prices in Beijing climbing 13% and Shanghai 12%. Talk has been around an extension of the property tax trial.

The ASX 200 is up a touch on the day, but again there doesn’t seem to be a huge amount of conviction from either the bulls or bears. The recent high of 5012.5 was tested again with good supply coming into the market at 5008, and clearly the momentum players would like a closing break of 5012.5 for a quick move to 5101. With the MACD above zero and RSI at 60, pullbacks should be contained within the higher trend and for now dips represent potential buying opportunities. Materials names have taken a breather today, although the momentum play in the space is FMG; however ILU, ARI and in the energy space STO looks strong as well. We would look to stay long here and trail stops.

AUD/USD has found sellers, which was certainly not helped by moves in China, although the real catalyst has come from USD/JPY which seems to be the centre of the FX universe. The higher USD/JPY is pushing up the USD against other G10 pairs, thus as the pair rallied from early Asian trade, EUR/USD, GBP/USD and AUD/USD came under pressure. We suggested traders would look to buy USD/JPY earlier in the week and the pair looks good for a break of the recent high of 100.48 and to test 101.53.

Europe looks set for another flat open, and this is a reflection of subdued Asian markets, while client business has been fairly two-way on our out-of hours markets. US earnings could get more of a focus today, with the highlights being Microsoft, Morgan Stanley and Baxter (which could have an impact on CSL tomorrow). Spain and France will tap the fixed income market in multi-maturity auctions, while UK retail sales could push the FTSE up to its recent ceiling of 6600 and cable back to 1.5200 if the monthly print comes in above 0.3%.

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