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The rise we’re seeing in equities is a sign that perhaps the QE tapering camp is unwinding some of the shorts that have dogged markets over the past few weeks.
The Asian region picked up a fairly good lead from US trade with the Nikkei (+1.3%) and ASX 200 (+0.7%) marching higher, though markets in China have struggled to gain traction. China H shares have been down 14 out of the last 15 sessions. The Shanghai Composite is down 1.2% today and the Hang Seng has shed 1.3%.
The recent spike in interbank rates continues to dog markets in China. Price action across all asset classes is showing uncertainty, and apart from a bounce in equities, it has been a quiet session in the risk space. Most of the data released, including the German ZEW economic sentiment, US building permits, housing starts and CPI, was relatively mixed.
A benign CPI reading removed any threat of rampant inflation concerns in the US. The key takeaways were that perhaps the investment community is beginning to feel it got ahead of itself with pricing out QE, and the US is not in a strong enough position for the Fed to rapidly change its stance. Recent data has certainly not blown expectations out of the water and from the CPI reading it certainly seems inflation is well under control.
The focus of the meeting
While the main focus in the FOMC meeting will be on comments regarding QE and tapering, there are also other factors to look out for. Economic projections will be crucial for market sentiment should Fed chief Ben Bernanke be as muted as he generally is without giving anything away. There is a high probability that Mr Bernanke will only make minor changes to his statement and will re-emphasise inflation and employment as the key metrics for adjusting asset purchases. Following the recent data, we wouldn’t be surprised to see minor revisions to growth and employment.
Currencies and commodities
The US dollar is likely to be the first cab off the rank when it comes to reacting to the data and the all other asset classes will react accordingly. European markets are pointing to a mildly weaker open and we are likely to see markets relatively sidelined heading into US trade. Major FX pairs have also been sidelined in Asia with USD/JPY flat at ¥95.40 and EUR/USD at $1.339. Risk will ramp up in Asia tomorrow as the region reacts to the FOMC meeting while there is other key data to look out for heading into the business end of the week. BoE Gov King will be on the wires after Ben Bernanke as he prepares to hand over the reins. We will also get China’s HSBC flash manufacturing PMI reading and BoJ Gov Haruhiko Kuroda is on the wires on Friday.
The ASX200 has managed to hold on to its early gains and even went as far as adding to the early gains, with the cyclicals leading the way for the change. With iron ore recovering over the past few days, the local iron ore names have also benefited. BHP has advanced 0.7% and RIO climbed 1.2%. The two companies look to be on track with their cost-cutting drive as RIO announces the axing of 50 executives from its corporate offices. Industrials are also feeding off the resource name recovery with a strong bounce for Bradken (+7.7%) and Boart Longyear (+6.7%).
Gold stocks are still languishing as the precious metal struggles to recover. The likes of Newcrest, Perseus and Troy are all weaker. The big banks are mildly weaker along with Telstra as the yield play, which remains out of favour today ahead of some key risk events.