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Clearly this is a huge week for markets from a macro perspective and we should see interesting gyrations going into the Fed’s mid-week meeting. The question ultimately from a trading perspective is if the Fed does leave the pace of bond buying unchanged, will we see much of a reaction? On the other hand, if the Fed does cut the pace of bond buying by say $10 billion, how much of a move in markets will we see given the probability of a taper is so line ball?
Of course the situation just isn’t that black and white as there are many more variables traders will need to see to assess whether pricing structures in the markets are correct. For me, the key behind the moves will predominantly come from any changes to forward guidance with regards to raising the Fed funds rate, and the market is now firmly of the belief that the Fed has to accompany tapering with a change to its forward guidance. This really makes the short-end of the US treasury market absolutely pivotal to all other asset classes this week. It also throws the probability of a taper just a bit more likely in the New Year, because the rhetoric we’ve seen from Fed members of late hasn’t been overtly supportive of a change in guidance just yet.
The other key issue is around the US political position; while we saw bipartisan budget agreement last week, reports are surfacing now that the debt ceiling could actually be a major issue. Could this be the ultimate reason that keeps the Fed from moving on policy?
US futures starting to pull back into the Asian afternoon
Still, in the equity space modest weakness has been seen in the Nikkei and ASX and China, while US futures have pulled back. In Japan the focus has been on the quarterly TANKAN survey, and while it highlighted an improving picture for large and small business, both for the current environment and outlook, the markets’ fairly lofty expectations were not quite met. What’s more, the pace of capex slowed to 4.6% in Q4, from 5.1% in Q3. Still, the fact that improvement has been seen should still be taken positively, and while the TANKAN survey is always a major data release in Japan, the survey due to be released in April will get much more attention.
In this survey we get Japanese businesses two-year view on inflation, but we also get the view on how companies see business conditions at the time that incorporates a rise in the sales tax. If the BoJ is going to ease monetary policy again (which seems to be consensus), then this survey could be fundamental in forcing the bank’s hand.
Some signs the ASX wants to go higher
The ASX 200 saw solid buying from the low of 5060 (down 0.7%) in early trade, giving tentative signs that this market looks like it wants to go higher, and we may get a more positive tape into Christmas. As the day rolled on and US futures dropped after lunch, the index has been better offered though. Looking at a number of the momentum-based indicators on the daily chart shows a market looking like it wants to head higher, but for now hasn’t given me enough to provide the conviction to take out long positions. I feel this could come in the next couple of days and will be a fairly aggressive set-up, but for now the bulls will happy to just see the index base, given the sharp move lower of late. The China HSBC manufacturing print at 50.5 took a little wind out of the markets’ sails given it was a slight miss to forecast, while AUD/USD fell around eighteen pips to a low of 0.8918.
Positive European open expected, although sellers emerging
European markets look set for a poor start, with sellers emerging into the afternoon. The EUR hasn’t really moved with any kind of increased vigour despite issues in Spain, while more notably we’ve finally seen the SPD party in Germany agree to join Angela Merkel’s CDU/CSU government. This is supporting the EUR to a degree; however the big talking point today has been around ECB member Joerg Asmussen leaving the central bank for a role in politics. Mario Draghi will no doubt have preferred him to stay and maybe we’ll hear the ECB president talk about his departure in today’s address.
Markets will be keen to hear future narrative from his replacement Sabine Lautenschlager, given traders don’t know a huge amount around her stance on monetary policy, and from all accounts will contribute towards the poor conservative fractions of the ECB. EUR/USD seems delicately poised right now and clearly needs to see a sustained break above 1.3800, with momentum starting to wane in the pair. Still it’s hard to see a strong pullback and range trading is preferred for now, especially given the expected levels of funds to be paid back to the ECB this week, which at €22.65 billion is huge.