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She seems to have struck the right balance; the US dollar did not sell off on her comments, while US equities rallied to record levels. While acknowledging the economy is significantly stronger and continues to improve, she said the US economic recovery is still fragile and as a result, prematurely pulling aid could derail the recovery. As far as tapering is concerned, Yellen emphasised that the Fed reassesses its position at every meeting, taking into consideration developments in the labour market and signs that the improvement will continue to progress. The arguments that the program is getting expensive and the risk of creating asset bubbles were essentially thrown out the window by Yellen.
Japan dominates Asia
Despite the dovish comments, the US dollar has remained resilient in Asia, particularly against the Japanese yen. USD/JPY has held its ground above 100 and this has really helped to drive Japanese equities today. With the pair trading above 100, the Nikkei has also managed to extend its gains above 15,000. However, we still need to see a close above 15,000 to confirm the break. The last time the Nikkei closed above 15,000 was back in May. While the economic calendar is winding down this week, investors are already looking forward to next week’s BoJ meeting, with some hoping to hear commentary suggesting stimulus is on the way. Perhaps reports suggesting Japan will consider a stimulus package without issuing new government bonds to fund it have contributed to the moves we are seeing today.
In the first half of December, Japan will compile an economic package to help offset the impact of the planned sales tax hike. As we edge closer to the BoJ meeting and the details of this package, buying the dips in the Japanese equities and USD/JPY is likely to be the preferred strategy. The rest of the region is also holding up quite well with markets in China rallying despite interbank rates rising above 5% to 5.36%.
European markets to open flat
Looking ahead to European trade, we are calling the major bourses relatively flat to mildly firmer. We already saw big rallies in Europe yesterday, so perhaps the rise in US equities was already priced in. However, the continuation of the rally in Asia could certainly give markets a kicker at the open.
Traders were on GDP watch yesterday with euro area Q3 GDP in-line with consensus. The main story however was France relapsing and returning to contraction (-0.1%). With continuing mixed readings, there will be plenty of emphasis on the region’s final CPI today, after the weak preliminary reading. Out of the US later today we have the Empire State manufacturing index, import prices and industrial production to look out for.