Asia looks ahead to Janet Yellen’s testimony

The US reporting season has gotten off to a positive start, with Citigroup setting the tone for the financial names.

Janet Yellen

With economic data also showing strong signs, then there is a good chance equities are in for further gains this year. In fact, Goldman Sachs also came out and upgraded its year end forecast for the S&P to 2050, which is at the top end of forecasts. This implies around a 3.7% rise from current levels so perhaps it’s not completely out of this world.

A big night for earnings is on the cards with Johnson & Johnson, JP Morgan and Goldman Sachs reporting pre-market and Intel and Yahoo in the after-market. As the S&P continues to edge higher, all eyes are on the all-time high of 1985.

RBA maintains its stance

Central banks have been in focus in Asia with the RBA minutes from the July meeting and the BoJ meeting taking place. As far as the RBA minutes are concerned, they didn’t necessarily offer much more than what the market already knows. In fact AUD/USD barely flinched on the back of the minutes there were no new developments. Keep in mind Glenn Stevens spoke in Hobart around two weeks ago and followed this up with a long press interview over the weekend.

Some analysts feel the fact the RBA has added the line ‘on present indications’ suggests they are leaving the door open for easing. While this is also consistent with market expectations, it could be a long wait as there is nothing concrete suggesting the RBA is close to pulling the trigger. The lack of reaction in the AUD could also be a factor of caution heading into Janet Yellen’s testimony later today.

Banks hit by Murray Inquiry

While the AUD has been relatively muted, there has been some volatility in the local market with the Murray Inquiry causing some gyrations in bank shares. After getting off to a good start, the big banks were sold off as comments from the inquiry hit the wires. The report raised the potential for mortgage risk weight floors, discouraged leveraging in superannuation funds and also seeks to give lenders better access to information about borrowers’ financial positions. While some of these factors could be a negative for the banks in the near term, they will help promote a more sound financial system in the long term.

The materials space has been mixed today with production reports being the key theme. PNA bounced back after yesterday’s losses as its copper output came in at the top end of guidance. Meanwhile OZL lost ground despite actually raising its 2014 output guidance. Some of the iron ore names have posted some gains today and RIO is seeing some positioning ahead of its production report tomorrow.

China data shows improvement

The Nikkei is leading the way for Asia as USD/JPY also bounces back after a subdued performance last week. The BoJ meeting also took place today with no changes to stimulus as expected. Forecasts were also mostly maintained apart from the FY14 median GDP which was revised marginally lower to 1% (from 1.1%). Perhaps the BoJ press conference will offer a bit more insight but unlikely to be anything new. Over in China, there were some solid figures released today which showed good growth in new loans, aggregate financing and money supply. Foreign direct investment also picked up as the market prepares itself for another raft of releases tomorrow. GP will be the key release with the market expecting 7.4% year on year growth from the second quarter.

US dollar in focus on Yellen

Looking ahead to European trade, we are calling the major bourses flat to mildly firmer. The German ZEW economic sentiment is the most significant reading to look out for but judging from the stubbornness of the euro in recent times, we might not see much of a reaction. Focus is likely to be on the US instead where we get Janet Yellen’s testimony, a raft of economic data and more corporate earnings.

At midnight (AEST) Janet Yellen testifies to the Senate and traders will be expecting modestly more hawkish (USD positive) language given she is testifying on behalf of the whole Federal Reserve, rather than her own thoughts.

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