Yellen testimony weighs on sentiment

Janet Yellen testified to the Senate Banking Committee and took a polite poke at the overstretched, overvalued tech space.

Janet Yellen
Source: Bloomberg

This completely overrode sentiment from the impressive numbers coming from the banking space with both Goldman Sachs and JP Morgan smashing estimates.

But these numbers couldn’t drag the market back from Yellen’s testimony and red development in the pockets she highlighted. It’s slightly disappointing that the news from the investment banks was drowned out by other events, but Janet Yellen is right to highlight tech stock trading on 440 times earnings; that is dangerously hot.

However what is lost from this is that in her testimony and from the results, the call that the US is becoming ‘self-sustaining’ is materialising with bottom-up data. With Bank of America, Wells Fargo, Visa and AMEX still to report, their numbers will give a clearer sign of actual growth that has been seen in leading indicators.

What was also clear from her testimony was that the FOMC is watching wage inflation closely. It is one part of the employment story that is still struggling to fire. Flat wage growth and flat inflation is why the current policy setting is and will be maintained and the board is in no rush to exit the current strategy.  

This is why, with the current macro environment relatively stable and micro figures showing upside potential, I still see the US as a place for upside potential in the short term and record highs are still likely on their way.

What's happening in Asia today

Asia will have all eyes firmly fixed on China today. Yesterday China released the amount of new loans for June at CNY1.08 trillion, a clear sign the Chinese are ramping up activity to meet their end of year forecast.

 

Today sees the release of Q2 GDP, industrial production, retail sales and fixed asset investment, and all are expected to below trend according to estimates. Therefore there are two scenarios that could eventuate today.

The first is that the figures are weak and there will be an initial fall before moving higher on expectations that the reserve requirement ratio will be cut further, and further disbursements will be released.

The second is that the figures are in line or better-than-expected and there will be muted moves as further stimulus expectations will be muted before rallying further, having seen China expectations being down trodden for most of 2014.

This is why we are currently calling the ASX 200 dead flat on the open at 5510. There is unlikely to be major movements until the data is released and morning trade will be based on the production reports from RIO and FMG (although FMG has already released its production numbers with the pre-release last week). All eyes to China at 12pm AEST and the market driver it will be.

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