Equities back to square one

Reversal was the key theme in overnight trade as equities gave back all of Wednesday’s gains and more.

Source: Bloomberg

The euphoria from the cautious tone in the FOMC minutes proved to be short-lived and perhaps even ‘stale’. On the data front, unemployment claims came in better than expected, fuelling the notion that the US economy is swiftly improving.

Additionally, Fed members were quite vocal – including James Bullard, who dismissed inflation concerns and said he was not worried about the impact of the USD on inflation. Bullard feels the Fed should begin tightening in late Q1, while Fischer said he expects lift-off around the middle of next year, plus the exact timing will be data-dependant. Lacker agreed with Fischer; overall it was a more hawkish tone.

Overall, the US dollar managed to recover some of the ground it lost against its major peers and equities and other risk assets struggled in turn. There will be more Fedspeak later today, with Plosser, Fisher, George and Lacker on the wires. There is room for more USD volatility as a result.

Euro sold on strength

EUR/USD was in focus as ECB President Mario Draghi spoke in Washington, essentially reinforcing his commitment to deliver price stability. He said the central bank is ready to alter the size and composition of its measures if need be.

EUR/USD tested $1.2800 but struggled to hold on and the selling resumed. This could accelerate in the near term as the greenback recovers some ground. Japan will be the interesting one to watch today after having significantly underperformed yesterday as the greenback was sold off.

Surprisingly, the USD recovery hasn’t really been reflected in USD/JPY and this could bolster the Nikkei if we see a turnaround today. On the calendar we have the BoJ monetary policy meeting minutes, tertiary industry activity and bank lending data.

Local equities to give up yesterday’s gains

Ahead of the local market open, we’re calling the ASX 200 down 1.3% at 5225. It has certainly been a choppy week for the local market and investors who went to bed feeling optimistic yesterday will wake up to red on the screens.

Company news is limited and we’ll therefore have to rely on macro themes for some direction. Early trade is likely to be predominantly risk-off, with stocks essentially giving up gains from yesterday’s trade.

At 11.30 AEDT we get the latest home loans data and RBA Assistant Governor Edey participates in a panel discussion at 11.45. AUD/USD managed to squeeze all the way up to $0.8900 yesterday but has since resumed its downward trajectory and slipped below $0.8800. Confidence will certainly have taken a hit and traders will be wary of longs.

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