Global markets focus on Janet Yellen

Equities have drifted higher in Asia, with a cautious tone prevailing as investors look ahead to Jackson Hole and Janet Yellen’s speech.

Janet Yellen
Source: Bloomberg

It seems the market is broadly expecting Yellen to remain fairly dovish, focusing on measures of labour market slack that support continued policy accommodation. In such a case, we might see a stall in the USD rally, followed by a reversal in most of the key currency pairs.

However, any shift away from her usual dovish stance could be a game changer and lead to further USD strength in the near term, bearing in mind yesterday’s minutes showed a switch to a modestly hawkish view. The key takeaway from the minutes was the fact the Fed views the labour market as improving more rapidly than expected. This could lead to a revision in the ‘underutilisation’ of the labour market view.

If Yellen comes in dovish ‘as expected’ but doesn’t go above and beyond what we already know, this could lead to a sell-the-fact affair in equities. A likely scenario is we’ll see equities extend gains initially before profit taking kicks in.

At the same time, any signs of a shift in Yellen’s tone away from her usual views is likely to be construed as moderately hawkish. In this case, equities are likely to come under pressure anyway. As a result, there is a good chance shares are in for a near-term pullback but this certainly doesn’t mean it’s the end of the rally.

Investors are likely to continue to look for buying opportunities on dips. Having said that, the S&P 500 is just 0.4% away from the 2,000 level and we're likely to see some nervous trading as we approach this psychological milestone.

Nikkei strength subsides

Looking at equities around the region, the Nikkei’s rally has stalled, along with USD/JPY as it consolidates near the 104 mark. It’s clear the pair and the index are both waiting for a catalyst and we are unlikely to see any big moves until Janet Yellen’s speech. The ASX 200 hasn’t gotten anywhere near yesterday’s high, with investors also awaiting a catalyst.

Santos has been the highlight of earnings today, with the stock delivering on every aspect. Once again, companies returning cash to shareholders continue to be rewarded as STO jumped nearly 4%. The company’s net income of $206 million was well ahead of a median estimate of $156 million. Underlying NPAT of $258 million smashed expectations with lower production costs driving earnings. STO has also maintained FY production guidance and sales were up a whopping 25%. Sales volume also impressed at 28.9 MMBOE and the interim dividend of 20 cps was ahead of estimates of 18 cps.

STO is one of the stocks analysts are most bullish about out there, and for the company to come out and impress is a big achievement. At the same time, the fact it is getting ever closer to achieving its LNG goals is extremely encouraging to hear, with the first LNG set to flow in 2015. On top of that, the new gas Browse discovery will go a long way towards lifting sentiment. Other interesting moves were in Iluka, which gained ground on a better-than-expected dividend, and Sims, which dropped after saying near-term conditions remain constrained.

Europe to open relatively flat

Looking ahead to European trade, we are calling the major bourses mildly weaker after having enjoyed some hefty gains yesterday. While investors focused on PMIs for the region yesterday, today will be mostly about Mario Draghi, who speaks after Janet Yellen.

With the region remaining in a tough position as data shows signs of strain, investors are increasingly hoping this means more stimulus is on the way. Recent weakness in the euro is also a minor positive for the region.

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