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With a week littered with event risk, traders will need to leave their holiday mode behind and be ready to trade with a ninja-like stealth.
Weekend newsflow centred predominantly on the raft of Fed presidents speaking in Philadelphia, with the end result predictably being hawkish comments from Charles Plosser and Jeffery Lacker. Eric Rosengren took the other side of the trade (he was the lone dissenter at the December FOMC meeting) and said inflation was too low, unemployment too high and thus the Fed should be patient when removing accommodation. The Fed chairman hasn’t really caused too much of a stir in what was his last address as Fed chairman, and with today’s Senate vote (on Janet Yellen’s appointment) we should see Janet Yellen get the full green light to take position at the helm of the Federal Reserve.
In some ways it would have made much more sense to hold off from tapering in December and allow Janet Yellen to actually announce tapering to the world. That way the market would have a clear view on her stance on policy, rather than a loose understanding that she is simply in agreement with the consensus. Still, Ben Bernanke will step down, potentially earlier than the official expiry of his term on February 1 and pass the full responsibly to Janet Yellen, with Stanley Fischer a welcome deputy. Their job will be an unenviable one, although they inherit an economy that is improving but (in the words of Ben Bernanke) ‘clearly remains incomplete’.
All eyes on the Feds forward guidance
The number one macro focus this year is US growth and how keenly markets test the credibility of the Feds guidance with regards to putting up the funds rate and it’s from here will we see how aggressive traders will get with the likes of the USD, fixed income, commodities and equities. The duo’s ability to perfectly articulate this to markets as the economy grows (or contracts) will be key.
It is a week where event risk in the shape of central bank narrative, economic data and US treasury auctions litter every asset class and geography. With this in mind, perhaps those traders who hadn’t had a chance to react last week have come in with a modestly pessimistic view on equities, with the ASX 200 down 0.5%, China CSI 300 recording a 1.5% fall, while the Nikkei has re-opened after being closed since December 30 and is over 2% lower.
One of the talking points on the floor has been the 60 point downside move in USD/JPY in early Asia trade. Certainly there was an element of selling as the Nikkei re-opened lower, with a number of investment banks reporting stop losses were triggered, exasperating the move lower.
There has been a slight continuation of the squeeze higher in gold and AUD/USD, with the latter eyeing Fridays high of 0.9005. Index rebalance in the GSCI and Dow Jones Commodity index occurs tonight and thus gold will be re-weighted causing artificial buying of the underlying. Gold bulls will be wanting to a daily close above $1250 (the 38.2% retracement of the October to December sell-off) and it’s clear that short-term momentum favours further upside and traders who are long should stay long, as I see no glaring signs in the technicals that point to a big reversal anytime soon.
Gold stocks doing nicely again
Good gains have been seen today in selective gold names in Australia and it seems logical that this price action will be replicated globally. We’ve seen no conviction either way from traders in the banks, while energy names have seen better short interest today, which seems logical given the downside moves of late in WTI and Brent. There’s been interest in a number of discretionary stocks, although the overall sector is not doing that well.
European markets don’t look overtly flustered by the poor tape in China and Japan, although we’ve seen better DAX selling, but on the whole not as much as we would expect given the impact the combination of a weak Chinese and Japanese market usually has. Still, there have been limited moves in US futures, and it seems that US will pay a greater focus on FOMC minutes, the raft of jobs data out this week, and the start of Q4 earnings season.
The event risk kicks off today though, with service sector data from the US, UK and Europe, with improvement the likely theme here. In the US the services ISM is considered a key lead indicator for Friday’s non-farm payrolls, given how big an influence the service sector plays in the economy. Traders will be keen to see if the same sort of expansion is seen in the new orders sub-component, while the employment sub-component could mitigate the risk of a poor payrolls print on Friday if good expansion is seen once more. EUR/USD seems to be finding good selling activity of late and as I’ve highlighted a number of times, it looks pretty vulnerable to further downside. A good US services print should push the pair lower.