Trader thoughts - the long and short of it

Trading during the local Asian session was dull yesterday, as traders sat in trepidation before last night’s US Federal Reserve monetary policy meeting.

Source: Bloomberg

The news flow was light, and traders carefully positioned themselves around their expectations for what that meeting promised to hold. Alas, the meeting arrived this morning and now markets reshuffle: as expected the US Fed hiked interest rates by 25 basis points, taking the US cash rate target to 2.25%. The outcome was well telegraphed and priced-in to markets, with all the interest (as usual) now in scouring the finer elements of the commentary released by the central bank. A deeper breakdown of the Fed’s text will follow shortly, but the overarching sentiment in markets at present is "everything is going to plan."

But first: a comment on what’s happened on the ASX 200 in the 24 hours. SPI futures at another pull back for Australian shares, following a day where the local index added a frustratingly slim 0.1%. Like the rest of the world – really, the world according to developed markets – Aussie shares were caught in the positioning in the lead-up to the meeting of the US Fed. The ASX didn’t experience the sell-off at its eventual close price around 6190 that we’d seen in the past. Instead, investors appeared to trade defensively, rotating into utilities and telco stocks, while also jumping into the energy sector on the back of higher oil prices. The lead into today’s session is a weak one, with Wall Street collectively deciding that the Fed’s meeting is negative-equities, meaning another day meandering between 6140 and 6200 appears on the cards.

Back to the real story: the US Fed meeting. The activity this morning, still fresh from the meeting’s outcome, is picking-apart the meeting’s highly anticipated dot-plot and performing a pedantic analysis of Chairperson Jerome Powell and his team’s language. The word – or more appropriately, the absence of it – “accommodative” is dominating commentary: it was removed from the Fed’s statement, setting algorithmic traders and punter alike, alight. Is the Fed finished with its decade long experiment in monetary stimulus, and now ready to lean-on the hot US economy? That’s the early assumption, but as news from Chairperson Powell’s news conference is released, the judgement from the Fed-Head is that the bank will still be there to support growth.

The important details are contained within the (aforementioned) dot-plot-chart, which is giving new insights into what the world of rates and bonds may look like in the coming months-to-years. Fundamentally, the central bank’s view hasn’t appeared to shift much since the last time the Fed hiked rates and released this document: the FOMC desires a gradual rate hiking path, reaching a neutral position in 2020 when rates hit about 3.50%. The data yields little information game-changing information on the face of it, but the key variable remains the difference between the Fed’s forecasts and what is priced into markets. A gap exists between policy makers and traders, implying that there is room for volatility in the currency and bond markets. The USD possesses more upside if the Fed’s hikes become prices in, and US Treasury yields have scope to climb higher.

Equity traders have apparently judged the outcome of the Fed’s meeting as unfavourable. The major US indices were unable to cap-off what was a solid day for Asian and European indices, dropping post-Fed to close trade down in the realms of 0.2-0.4%. Given the Fed’s reasonably consistent line this morning, the reason for the dip in US indices isn’t immediately clear. Perhaps it is a matter that today’s meeting, for many, truly marks the end of “accommodative” monetary policy era – and therefore the era of cheap money. With fundamentals as strong as they are in US equities, that’s probably a stretch. Wall Street’s decline isn’t truly remarkable, amounting to only a tiny pull back in the broad picture of a recording beating market. The rest of the week will be a point of interest for US shares, with traders allowed to trade purely on corporate fundamentals, and away from major event risks.

Moving away from the Fed and its impact, some comment must be made about Chinese markets this week. Chinese indices register a solid performance yesterday, adding credence to the view that a bottom has been reached in Chinese shares and a change of trend is emerging. It's early days, and with the trade war likely to hangover markets for the rest of year (at the very least), dips in Chinese indices from traders selling rallies will probably remain a theme. However, price action on major Chinese indices yesterday showed a break of resistance, with the CSI300 (for one) closing above the significant 3400-mark. Attractive valuations and plus-2% yields in Chinese large-caps appear to be attracting the risk-tolerant, smart-money investors, potentially establishing a base for the market here. Though the trade war and the fortunes of the Yuan will keep risk elevated, it seems these markets are ripe for the risk-tolerant, value chasers.

The event risk in the Asian session comes this morning in the form of the RBNZ. As was forecast, the bank has kept interest rates on hold at 1.75%. The meeting this morning began taking on an interesting light yesterday, after the NZ Business Confidence print revealed improving business sentiment. The Kiwi spring boarded itself consequently, adding to the gains recently sustained courtesy of diminished-global growth risks and this month's GDP print. Despite the improvement in sentiment, the RBNZ haven’t changed their tact this morning, given economic conditions are still relatively soft. The NZD/USD is steady post the meeting but possess risk to the downside in the short term, with the 0.6500-handle open and exposed.

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