Mixed trade ahead of the Fed

Global equities seem to be exercising some caution ahead of the Fed but I still feel nothing has changed given the significant amount of ‘puts’ in the market and policymakers’ commitment to supporting growth.

Source: Bloomberg

Of course, most of the commentary today will be around the FOMC meeting but it’s important to remember that tightening will happen eventually. Unfortunately, the later it happens, the faster it’ll potentially happen.

Conversely, if they do start hiking earlier then the move is likely to be gradual. The greenback is relatively flat heading into the results of the meeting but I’m sure volatility will resume soon after. What’s perhaps crucial for the Asian region is that a more hawkish Fed will lead to capital flight from emerging markets if the timing surprises.

Equities in China have continued to nudge higher – not even another poor property prices reading was enough to see the rally stall. February property prices fell in 69 out of 70 cities as the sector continued to struggle. However, the premier, Li, is keeping equities buoyant after comments from the weekend suggested China will be looking to defend its growth target this year.

Fortescue takes a hit

The impact of a slower China growth rate is being felt by the ASX 200, where confidence in the mid-tier mining space just seems to have departed. Declining property prices are not good for resources demand, particularly iron ore and coal.

Iron ore supply has been ramping up and demand has not quite been in similar form. Many would think any stimulus hope for China would prompt demand but this is no longer necessarily the case as recent China stimulus has been highly targeted.

Rural and agricultural development has been in favour with officials recently, as opposed to property and infrastructure as in the past. The growing speculative nature of many of the mid-tier iron ore names has been made apparent by Fortescue Metals’ current demise. Buying any significant dips in FMG in the past used to be almost a sure bet but now you get the sense investors are beginning to doubt in a big way.

The fact the company has had to pull its bond issue (after having failed to secure a bank loan facility), leaving it with a hole in its balance sheet, has seen its share price pummelled today. The fact iron ore prices continue to deteriorate is not helping the case at all as it only means cash flow will slow significantly.

Investors will now be wondering where the funding to fill the gap will come from. In fact, unless a resource company offers attractive yield as is the case with BHP, WPL and RIO, then investors seem uninterested at the moment. Energy names are also in a similar position as an oil glut has triggered fresh selling.

Fed language key

Ahead of the European open, we are calling the major bourses mildly firmer. There isn’t much on the European economic calendar but in the UK we have a raft of releases. The BoE minutes will be released, along with the claimant count change and average earnings. The unemployment rate is expected to marginally improve and then we get the annual budget release later on.

All these releases will put the pound firmly until we get the results of the FOMC meeting. This will be the key event and is likely to be greeted by some interesting price action, starting with the greenback.

Wording is the buzzword and many feel Janet Yellen will get this absolutely right. Bottom line, the data-dependency of rates lift-off is likely to be reinforced and this could be accompanied by a tweak in the language, particularly around the ‘patience’ reference.

The smart money is likely to be looking to react to the results here as opposed to pre-empting them. The simple reasoning is that the move isn’t likely to be a mere flash in the pan and there will be plenty to digest from the meeting and press conference.

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