Getting past Halloween

The US markets snapped out of a four-day winning streak overnight. The futures market Asia will likely follow suit, while the ASX should snap out of a seven day rally.

Source: Bloomberg

The next seven days will be highly influential on the run into the end of the year as the big macro events are released. One will come from the Fed, the other from the ECB.

The FOMC is currently in its blackout phase, meaning no commentary will be given until after the meeting – the one we have been waiting for all year. The dual mandate of employment and inflation remains on track and, with the inflation read overnight, there is no reason the Fed will hold off unwinding the final part of the asset purchase program.

I have heard the remaining US$15 billion a month being described as insignificant. Compared to the US$85 billion a month at the height of the program it is, but the end of the program bring with it other variables that can’t be quantified yet.

If  the program is fully unwound on Wednesday night (and we believe it will be), the removal of the ‘considerable period’ inches closer.

December is historically one of the lowest-volume months of the year. Having seen the market volatility created by the mere speculation of rate rises over the past eight weeks, this simple phrase represents the two most watched words in the US.

With no scheduled FOMC meeting in November, I see Wednesday’s meeting as the last chance to remove ‘considerable period’ from the statement in 2014 – the language used will define the final months of the year. As I said, inflation and employment are tracking as planned and the US remains the bright spot in the global economy. There is a chance this could come to fruition.

There is, however, only a chance. Yellen and Co. remain as dovish as ever (most of the voting member anyway), and I believe the concerns around Europe and other parts of the global economy will allow them to maintain the status quo in the FOMC statement. This is why there is increased talk of a market rally come the end of the year – we watch and wait.

Europe is also being watched for any official signs the balance sheet has begun to expand. With market rumours creating a rally on Tuesday, ECB Governing Council member Ewald Nowotny has poured some cold water on the street rumour, saying ‘corporate bond purchases are one way the Bank might achieve its goal of expanding its balance sheet’. However, he added that there remain various open questions related to this and that no decision had been taken by the Council. ‘The ECB should not be too activist in its monetary policy and lead markets to expect something every month. Instead it needs a steady-hand approach.’

This seems to have put the rally in Europe back in the bag. This too is likely to resolved in the coming seven days. In short, both events will see volatility and sharp moves in both directions on the back of the rumours.

Ahead of the Australian open

We’re currently calling the ASX 200 down 19 points to 5366 and would see the ASX snapping a seven-day purple patch. The market is back in the black for the year with the rally spanning the sectors, which is good to see. I can imagine the market will close the year out higher. However, with the banks turning ex-dividend in November, whether they recover after the dividend will be highly influential to how the ASX finishes the year.

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.