Fed's dovish tone sparks Asian trade

The boards have lit up in Asia today after the Fed delivered a dovish tone, while the market seemed to have been positioned for a slightly more hawkish tone.

Federal Reserve
Source: Bloomberg

This saw US equities extend gains to fresh record levels and this has also resonated through to Asian markets. The main driver of hawkish expectations heading into the Fed meeting was the better-than-expected CPI reading released earlier in the week. With inflation picking up and unemployment falling, many investors out there were beginning to feel perhaps the Fed might be looking to raise rates sooner.

However, this proved not to be the case with Janet Yellen going as far as saying the data we are seeing is noisy regarding inflation. There was a degree of downplaying the recent recovery to an extent with the impact of the Q1 performance clearly leading the Fed to exercise caution. Bar any significant unforseen events, it actually seems there is a good chance the US economy will outperform the Fed’s projections.

One asset that’s looking quite interesting is gold at the moment. Earlier in the week gold struggled after testing a key downtrend resistance. This is now back in play after a recovery and it’ll be interesting to see if this can be finally broken.

China to achieve growth target

Adding to the positive sentiment were comments by Premier Li regarding China’s economy. Premier Li reinforced his country would maintain a minimum growth rate of 7.5% and ruled out a China hard landing. These comments were made during his London visit and will go a long way towards alleviating some concerns that China will not reach its growth target this year.

While equities in China haven’t really fired on all cylinders today with the Hang Seng and Shanghai Composite mixed, the rest of the region has really taken off. In a sure sign that the market is feeling bullish today, Japan has even rallied despite USD/JPY remaining subdued below 102. Data showing some good buying in Japan bonds kept the yen fairly steady in Asia but this didn’t stop investors from bidding Japan’s equities higher.

ASX 200 led by the materials

The ASX 200 has taken off today with the materials finally contributing to the market’s gains. It is almost as if investors have decided the time to buy has arrived with recently underperforming miners particularly enjoying some strong buying interest. Fortescue has led the way after finding some stability in the $4 region which has now encouraged buyers to rush back into the stock. BHP and RIO have also enjoyed gains of around 3% whilst gold miners are also in good stride.

Gains in the miners have also lifted the mining services companies which have been serial underperformers lately. I have also been watching Worley Parsons closely as it approaches a key level in the $17.50 region. The stock gapped lower in November last year on the back of a profit warning which saw it drop onto the $15 range. Whilst it has been a long road to recovery, it finally seems like the stock is drawing some interest again helped by a buoyant energy sector. Banks have also done really well today getting a bump from a dovish Fed and also stimulus out of Europe announced recently.

Europe in for a positive start

Looking ahead to European trade, the positive sentiment is set to continue with the major bourses pointing to some good gains. The European economic calendar is relatively light but there will be some activity on the UK economic calendar. GBP/USD is certainly the pair to watch at the moment as it knocks on 1.70 with some activity on both sides of the equation. The pair remained bid, also helped by USD weakness, but this 1.70 barrier is proving to be a significant challenge for the bulls. However, momentum remains firmly to the upside and this week’s highs are likely to be tested again in the near term. A close above 1.70 should be enough to convince the bulls to add to longs.

Later today we have UK retail sales and CBI industrial order expectations due out. There is more data on the US side, with unemployment claims and the Philly Fed manufacturing index.

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. 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. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.