Global markets focus on the Fed

It has been a slow start to the week for Asian equities with Japan’s election result failing to deliver the fireworks many would have expected to see. 

Source: Bloomberg

While the result was largely expected, I still feel there is room for buying dips in USD/JPY and the Nikkei given Prime Minister Abe is only likely to ramp up his strategy. The fact that many continue to doubt whether Mr Abe is capable of delivering a successful economic strategy goes a long way towards contributing to the subdued price action.

Focus now switches to the US dollar side of the equation where this week’s FOMC meeting promises to be a pivotal event. Following recent data, particularly on the jobs front, the risk is for a hawkish shift in the Fed’s stance. This would see the Fed sound more upbeat on the economy and could even go as far as dropping the ‘considerable time’ reference to its language. The risk will be on the inflation front where declining oil prices could potentially derail the progress that has been made. Some analysts have argued that the recent fall in prices will give the Fed ample reason to keep the ‘considerable time’ reference.

Whatever the outcome, the main issues will be how the Fed manages expectations. On one hand it wants to sound optimistic, but not so hawkish that it derails the recovery/confidence. At the same time the Fed doesn’t want to sound overly cautious and spook investors. However, I feel positioning on the USD is likely to be hawkish heading into the meeting with traders focusing on the dot plot.

ASX 200 rallies off lows

The ASX 200 has managed to rally off the lows with headlines dominated by the hostage situation in Sydney. The mid-year economic and fiscal outlook release was meant to be the main event of today’s session and somewhat took a backseat through trade. The main takeaway from the review was a wider-than-expected 2014 to 2015 deficit of around $40 billion (versus initial estimate of $29 billion). The positive is that it doesn’t seem the government is looking for a tighter fiscal stance to achieve its surplus and is likely to rather focus on growing the economy going forward with a target of 3% plus growth. Consecutive forecasts for commodities such as iron ore seem more realistic as terms of trade come under significant pressure.  Presumably the dire forecasts will also force the RBA’s hand as the government pursues growth for the economy.

Weaker open for Europe

Ahead of European trade we are calling the major bourse lower, tracking the moves we are seeing in Asian trade. Greece will remain a main point of focus this week with the first round of presidential elections taking place on December 17. Given Greece was a big source of volatility last week, this should be a key event for fixed income and in turn the single currency and equities.

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