Traders await FOMC

We may be pushing it too far to describe overnight movements as down to FOMC play. While US equities are losing bullish momentum, despite Dow Jones ending at another record high close, European traders were emboldened by news that the European Central Bank (ECB) will ‘slightly’ increase its bond buying ahead of the liquidity lull in the summer.

A U.S. flag flies on top of the Marriner S. Eccles Federal Reserve building at sunrise in Washington
Source: Bloomberg

The equity markets reacted to the news with DAX and CAC rallying over 2%, but the market may realise over the next few sessions that things have not really change.

The increase is to allow the ECB to maintain its monthly average of €60 billion in asset purchases and will be compensated with lower purchases in July and August. This is a smoothing of ECB QE instead of an expansion of the stimulus.

Furthermore the Greek situation remains on the radar, while latest ZEW survey shows deteriorating German sentiment.

The anticipation of the FOMC narrative should also temper bullishness today. In the currency markets, the greenback continued to extend gains on the back of a euro decline as well as solid housing starts data. Meanwhile, the FOMC minutes will shed clarity on the outlook for the US economy.

The Fed is expected to maintain its data-dependent stance while stressing that a rate increase, even a symbolic move, is still possible this year. While it is beyond the ability of the Fed to eliminate market speculation, it can certainly improve its communications to prepare the markets for an eventual rate lift-off, which should soothe potential ‘tantrums’.

Oil rally losing lustre                

Oil prices were hit by a resurgent US dollar and signs of increasing production. Fears of Middle East tensions disrupting oil supply were put on the backburner ahead of an OPEC meeting in June. Most analysts are not expecting OPEC to cut output. With the underlying conditions remaining the same, the rally in oil prices over the past few months would likely dissipate.

Ahead of the Asia open

In Asia, we expect cautious sentiments to dominate the session as traders await the release of the FOMC minutes. Domestic developments may continue to drive markets for the time being, but movements may be capped. In Japan, better-than-expected GDP reading lifted the Nikkei with the Index climbing towards 20,200.

It would be interesting to see if the strong rebound in Chinese equities will extend into today’s session. The announcement of a cooperation agreement between Euronext and Shenzhen Stock Exchange on exchange traded products may inject fresh buying demand in Shenzhen equities.

Liyang Jin, Executive Vice President of SZSE said the partnership with Euronext will further facilitate cross-border investment and financing activities. Ahead of the Asia open, we are calling CSI300 4764 +33, Hang Seng 27696 +3, Nifty 8340 -25, and MSCI Singapore 387.1 -1.

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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