Equities rally as Fed sounds cautious tone

Risk assets are enjoying a relief rally in Asia in a move triggered by the FOMC minutes release from the September meeting. 

Source: Bloomberg

After a long period of underperformance as markets priced in a greater possibility of a rate hike, the FOMC minutes seem to have ‘temporarily’ poured cold water on this notion and given some relief to struggling equities. The main points from the minutes were that the Fed downgraded its growth outlook slightly in the short and medium term due to a stronger projected USD and a slower rate of home price appreciation. Additionally risks to global growth will be a factor and inflation forecasts were revised down a touch.

Essentially the Fed sees greater downside than upside risk to growth outlook. The Fed also highlighted communication challenges associated with the ‘considerable time’ reference, as dropping it would essentially be tightening. While the minutes certainly sound more dovish than the market expected, it seems markets have simply used this as an excuse to recover some ground. The reality going forward is the ‘considerable time’ reference will largely be data dependant and as long as data is tracking ahead of expectations, then we can still expect lift-off around mid-2015.

Focus now switches to more Fed speak later today with Mr Bullard, Mr Tarullo, Mr Fischer and Mr Williams set to speak. Additionally we have unemployment claims due out. Even if we get hawkish Fed comments and strong unemployment claims data, the momentum seems a bit strong at the moment and we are likely to continue retracing some of the recent losses.

Greenback loses ground to the AUD

The US dollar is likely to remain under pressure in the near term as positions unwind after traders had increasingly positioned for a hawkish Fed. This unwind in the greenback has worked wonders for AUD/USD, which had been under significant pressure in recent weeks. There has been quite a stir surrounding the ABS and how Australian jobs numbers are calculated recently after a monster jump in August and consequently revisions for July and August.

The ABS had already warned that the usual seasonal pattern through Q3 has not been evident and therefore would not apply the usual seasonal factors. As a result, I think from today’s data the market just wanted to see some sort of normalisation no matter what the reading was. Anything out of the ordinary was never going to be taken credibly.

Today’s data showed 29,700 jobs lost which was much worse than an expected +15,500. The unemployment rate remained steady at 6.1%, but the participation rate dropped a whopping 0.4%. AUD/USD’s initial reaction to the numbers was negative but has since managed to recover presumably as the market questions the reliability of the data. The pair is now consolidating around $0.8850 region and looks primed for a squeeze into the $0.8900 region.

Europe in for some gains

Ahead of European trade, we are calling the major bourses firmer as investors react to the rally through US and Asian trade. Key markets such as the DAX have tested some significant support levels recently and it seems this rally has arrived just in time to relieve the stress. EUR/USD also managed to recover some ground on the back of USD weakness but seems to have stalled after retesting July 2013 lows in the $1.2760 region.

There is still a clear lack of confidence in the single currency and it faces further tests today with German and French trade balance data. What will probably grab more attention will be ECB President Mario Draghi’s speech at the Brookings Institution where he is likely to comment on the developments for the Eurozone.

While nothing will be expected after last week’s meeting, any changes in language could cause volatility. In the UK, the BoE will hold its meeting and following Mark Carney’s recent comments, investors will be looking to see if the central bank is any closer to hiking rates.

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