Eye of the storm or brighter days ahead?

The Fed can’t stay out of the market at the moment. St Louis President Jamie Bullard has done a complete about-face by calling for the Fed to hold off on unwinding the asset purchase program at the end of the month.

Source: Bloomberg

This call comes no more than two months after a hugely hawkish speech, stating the Fed had been too slow in unwinding the program and was ‘very worried’ about being overrun by ‘runaway’ inflation. He implored the board to raise rates now to ward off the expected inflation risk building in the US economy.

San Francisco President John Williams, who is (was?) an über-hawk, came out publically on Wednesday night saying ‘more QE could end up being necessary’. Could you imagine a QE4 program? The markets will champion this as it depresses normal market volatility and the movement in the bond markets overnight suggests it would lap the free cash up with glee. However, the question remains – can the US economy stand on its own two feet?

The Street has been demanding ‘consistency’ from the Fed’s communication in the face of the increasing market volatility, growth concerns and rising USD. It appears to have buckled and is now changing its tone.

So what does this mean for the markets? Are we in the eye of the storm or have we going to see brighter days to come? The answer to that depends on where you’re looking. The US market has seen several waves of support over the past few days and it looks like the knife may have hit the floor. US futures have also seen a floor but December’s futures have the S&P at 1850, suggesting a slight disconnect.

Europe, however, looks to be in the eye of the storm as we saw a Spanish bond auction fail overnight. Greece has been pushed out of the market on pricing and has seen yields rocketing higher. It is also heading into a general election, which will create its own volatility, considering the state of Greek politics. France and Italy continue to refuse structural reforms to reduce debt, while Germany is heading to the European Court of appeals to block parts of the ECB’s asset purchase program it deems unconstitutional. Europe remains a real concern and a beacon of volatility. The DAX looks as though it will continue its slide.

Ahead of the Australian open

This brings me to the ASX; is the local market in for brighter days? Yesterday’s price action would suggest ‘yes’. $7.1 billion change hands yesterday – the daily average in 2014 is $4.9 billion. The 144% trading day and the 92 point rally in the afternoon points to very positive price action. It was broad-based and saw the banks doing some solid lifting.

Coupled with this, the ASX had lost over 15% at the bottom of the current cycle in USD terms, which means we are becoming attractive again for foreign investors who fled the ASX at the beginning of the downtrend.

What will also be interesting this morning is the energy space, which was smashed on the slide in the Brent price. The numbers out of Woodside yesterday were very strong and highly encouraging – the space will probably outperform over the coming years. I would suspect a solid bounce today, considering the sector has been oversold and under-loved over the past six weeks.

However, we are currently calling the ASX 200 down seven points to 5247. This may provide addition buying opportunities and should see the ASX finishing the week in the green, making the second positive week in the past three.

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