Janet looking to continue loose monetary policy

Markets in Asia have come to life as with the business end of the week delivering some volatility.

While US trade was relatively subdued heading into Janet Yellen’s testimony, Asia got a kicker from her introductory remarks. Yellen highlighted that the Fed still has plenty of work to do on the economy, with unemployment still too high and inflation below the Fed’s 2% target. This sets the scene for a fairly dovish testimony by Janet Yellen at the Senate hearing tomorrow.

The question now is whether she can survive the wave of criticism that the Fed’s bond-buying program is likely to face from politicians. She will really have to justify maintaining the program at the current pace, as the Fed’s balance sheet blows out to $4 trillion. As a result, Yellen might actually play the fence to an extent in a bid to keep everyone happy.

While expectations of December tapering were slightly rising, the market still largely felt the current state of data wouldn’t allow the Fed to taper until next year. Forward guidance is probably going to be key for the US dollar and the rest of the market. The change of guard was also highlighted by the limited press Fed chief Ben Bernanke’s comments received today. Bernanke essentially reiterated the challenges the US economy is facing with comments well aligned to those of Janet Yellen.

Nikkei approaching 15,000

These comments were negative for the US dollar as it gave up ground against the majors, particularly the risk currencies. In fact the only major currency the greenback hasn’t really lost ground to is the yen, as USD/JPY held onto the 99 handle. Traders are struggling to pick a direction in USD/JPY as bulls buy dips into 99, while exporters are selling near 100.

With USD/JPY holding its ground around 99.50, the Nikkei has been resilient and is leading Asia today. There has been some activity out of Japan today with GDP coming in ahead of expectations on both a quarterly and annualised basis. Despite the positive GDP reading, it was a fairly big drop from the previous quarter which prompted investors to talk about further stimulus from the BoJ. Weekly fund flows data also showed acceleration in Japan buying foreign bonds, while foreign buying of Japan bonds fell sharply. This seems to have been enough to underpin Japanese equities today.

Looking at the rest of the region, China is lagging with the market still showing signs of disappointment around the lack of detail from the third plenum. There is also a mild rise in China’s seven-day repos to 4.5% (high of 4.9%) after the PBoC abstained from open market operations today. This has weighed on the Shanghai Composite and capped gains in the AUD.

Europe set to open firmer

The pound and the euro were big talking points in yesterday’s trade, with fundamentals for both currencies showing some divergence. BOE Governor Carney flagged the possibility of a rate hike in 2015 as the economy recovers, highlighted by a sharper-than-expected drop in the claimant count change. Meanwhile for the euro, the situation remains dire with Praet saying the ECB could adopt negative rates to lift inflation.

The recent rate cut was prompted by a poor CPI reading and many analysts still feel the rate cut was merely a token measure and won’t have as much of an impact as negative rates or another LTRO. The major European bourses are currently pointing to a firmer open, with plenty of releases on the calendar to keep an eye on. Later today we have UK retail sales due out at 20.30 AEDT, with a flat reading expected. Any surprises to the upside could prompt the pound higher. Over in the eurozone, it will be all about GDP readings later today with a raft of releases due out.

James Hardie results impress

The ASX has surged today and managed to erase part of yesterday’s hefty losses. Most sectors are generally well bid with the financials and retailers leading the way. One of the standouts in today’s session has been -AUJames Hardie which surprised with better-than-expected second quarter numbers. Net operating profit excluding charges for the second quarter came in at $56.3 million versus the medium estimates of $50.1 million, taking first half 2014 NPAT to $108.3 million. Considering the company gave FY14 guidance of $165 to $194 million in late August, NPAT actuals have now reached 61% of the midpoint of FY14 guidance.

This has led JHX to upgrade FY net earnings to $180 to $195 million compared to the medium analyst estimations of $171.2 million prior to the results. The jump in profit guidance has seen the stock post double digit gains, and with an eight cent unfranked dividend - two cents above the street view; JHX has rewarded investors for their service to the company, taking it to a record all-time high.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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