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Last week, global equities staged a solid rebound as earnings from the likes of Caterpillar, 3M, Boeing, Dow Chemicals and UPS helped investors mark-to-market the corporate outlook to the current economic climate. This week, the FOMC meeting could give investors and traders a similar view, sense checking current market pricing around future Fed moves on rates relative to how the public see things.
Interestingly, each region has its own unique catalyst despite central banks acting once again to calm volatility.
In Japan, the move in USD/JPY to reclaim the ¥108.00 level has helped the Nikkei, while the market continues to expect clarification around the Government Pension Investment Fund (GPIF) portfolio reallocations. In China, we have seen targeted liquidity measures, which have equated to the equivalent of 100 basis points of easing of the more permanent Reserve Ratio Requirements (RRR). However, the delay and the lack of near-term enthusiasm for the China-HK ‘connect’ is subtracting from sentiment as traders had expected a wave of fresh liquidity to enter both markets. The Hang Seng is down around 0.7% today.
The ASX 200 eyeing 5466
In Australia, the ASX 200 is eyeing the 61.8% retracement of the 9.8% sell-off over August to September at 5466.53. If we are going to see an assault into year-end, then this level will need to give. Locally, most have pinned the move higher on the banks, but the gains made since the index troughed on October 13 have actually been very broad-based. On 13 October, some 93% of ASX 200 listed companies were below the short-term 21-day moving average. However, that percentage now stands at 27%, giving a good representation of the move higher.
Three of the big four banks report full-year numbers in the next two weeks, with the market expecting solid earnings. Outlook statements will be the longer-term driver, however. While each bank has their own unique vision for driving earnings growth, investors will be keen to look at views around credit and macro-prudential rules, and Asia will be particularly interesting for ANZ’s shareholder base.
Trading these names is a different beast and, although, earnings are naturally very important (as is the perception around dividend income), consideration needs to be taken of AUD stability, as well as implied volatility, although these two inputs are very much linked.
A fall in volatility (as we are seeing), aligned with range trading in the AUD/USD, should see traders look at yield, putting income strategies in vogue again. Buying any pullbacks in the banks looks a good strategy here.
The European Stress tests don’t throw up any surprises
In Europe, the stress tests and Asset Quality Review (AQR) may have taken a year. However, outside of the banks and the officials who conducted the review, the event should disappear into the background, soon to be forgotten by market participants. Most would say the tests themselves are credible, so the calmness shown in EUR/USD, FTSE and S&P 500 futures today could be construed as a good result. The fact European banks had raised a sizeable amount of capital between January and September this year has limited the amount needed to €9.5 billion. This is easily achievable without putting their equity under real stress.
The market had been expecting a result of this nature. Over the last six days, the Eurostoxx financial sector has gained 14%, relative to that of the broader index which gained 8.5%. The review of the banking sector was rigorous, and investors now have a detailed view of the capital held by banks. If the European economy were to deteriorate significantly, we know they shouldn’t face a systemic event. However, the issue of credit demand is the key talking point on the floors today – that is something the central banks and governments need to promote.
European stocks should find buyers on the open this morning, taking in the close from the US and subdued trade in Asia. Our clients haven’t really been enthused by the AQR and, to be fair, don’t really see this as a long-term catalyst. There has been some buying of EUR/USD today but there is no real conviction, especially ahead of the key event of the week – the FOMC meeting. With a slight increase in Euro M3 money supply expected today and the IFO survey also on the docket, this could explain the buying in EUR/USD, although it’s unlikely to really move markets significantly.
Earnings will come in thick and fast as the US is having its busiest week thus far. However, numbers from the UK, Europe and Japan will also be in play. There’s something for both macro and micro watchers this week, but it has to be said that the price action is looking bullish. In my opinion, pullbacks look like opportunities to accumulate on current news flow.