Fed still holds the key

Global equities remain in a holding pattern with optimism around Greece the dominant theme.

Source: Bloomberg

Apart from Greece it seems there is renewed focus on the US economy and monetary policy divergence, which continues to play out in global markets. Traders and investors just have to get their view on the US dollar right to have a high probability of success in these markets.

There was some hawkish commentary out of the US with Fed Governor Jerome Powell saying economic conditions would evolve in such a way that the Fed would hike in September and December. This has been a big debate and would be consistent with the median dot in the Fed’s projections.

As the yield curve is steepening, fanned by a rebound in housing, there will be fears the market is behind the curve and some catch up is needed. If the Fed’s projections are right, then there could be room for further USD gains. With the Fed firmly in data-dependant mode, this puts traders on high alert as data continues to flow. On the calendar today we have revised GDP while fedspeak will continue to flow through the week.

Japan at 1996 levels

Having said that, the greenback has been generally bid against the majors. The euro, yen, sterling and aussie have all lost ground to the greenback in a sign there is a resurgence on the horizon. USD/JPY has made its way back above ¥124.00 and I feel it is only a matter of time before early June highs just shy of ¥126.00 are retested.

The Nikkei is leading Asia and trading at the highest since April 2000. If we close above 20,910 then we’ll be at the highest level since December 1996. BoJ minutes released today signalled growing optimism about the economy and it seems confidence in equities hasn’t been greater in a very long time.

We currently have a situation where economic conditions are improving in Japan and officials are still happy to maintain an ultra-accommodative stance. This is fuelling the liquidity trade and equities are clear beneficiaries. The ASX 200 has quietly eked out gains with investors continuing to focus on income stocks.

Greece still in focus

Ahead of the European open we are calling the major bourses mildly firmer with the exception of the FTSE, which is set for a flat open. A round of encouraging PMIs across the Eurozone helped support sentiment and analysts feel this will give GDP a bit of a kicker.

In fact, the overall composite PMI for the region rose to 54.1, making it a three-year high. On the Greek front, focus shifts to today’s Eurogroup finance ministers meeting ahead of tomorrow’s EU leaders meeting. The problem for Syriza now is drumming up domestic political support for the deal with some opposing officials citing pre-election promises to bring about change.

Greece still needs to vote on the proposal in the parliament over the weekend. As usual, bonds, equities and the euro will remain on high alert through the process. The single currency struggled across the board and EUR/USD dropped to $1.1150 – its lowest level since 8 June.

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