Global markets switch focus to the Fed

Equities have pared back some of the recent gains with a sense of caution prevailing after a couple of events in US trade spooked investors. 

US markets
Source: Bloomberg

inflation data perhaps didn’t get enough attention. The headline CPI came in a touch ahead of expectations, while the core readings were in-line with estimates. There had been speculation that the recent drop in energy prices will also see inflation stall, but this data proved this is not necessarily the case. With inflation weathering the drop in energy prices, this adds fuel to the hiking mid-2015 debate and with the FOMC meeting coming up next week, data is very relevant right now.

There have been suggestions the Fed will drop reference to the ‘considerable time’ phrase as far as hiking is concerned and switch from a timeline-based to a more data-dependant approach. Given some dovish Fed members have expressed concerns about inflation running below trend, the fact this data showed it remains consistent with the Fed’s trajectory is quiet significant.

On the calendar today we have unemployment claims and the flash manufacturing PMI to look out for. Unemployment claims will be particularly interesting after the sharp drop to 264,000 last week. Looking at earnings, the positive run continued in yesterday’s session, but this was not enough to lift markets. Today’s session brings reports from Caterpillar, Amazon and Microsoft.

China data showing signs of improvement

Most of the equities around the region are modestly weaker, but off their lows as caution also prevails following recent gains. Data has been limited in Asia today with the region pinned on the HSBC flash manufacturing PMI reading. The reading actually showed a mild improvement and came in ahead of estimates (50.4 versus 50.2 expected). While activity remains subdued, perhaps the biggest positive is the fact it has stopped contracting. The market is pretty keen to see China’s officials continue to deploy targeted stimulus and this data is enough to keep them on their toes.

The ASX 200 has been fairly resilient and it is clear investors are quite happy to buy the dips, particularly in the banks. Heading into bank earnings and dividends, investors tend to be happy to buy into these events. This could lead to renewed divergence between the materials and financials in the near term. As a result, the next couple of weeks will be pivotal for the domestic market.

Europe eyeing stimulus

Ahead of the European open, we are calling the major bourses weaker as they play catch-up to some of the losses seen through US and Asian trade. Equities extended gains yesterday with investors focusing on reports the ECB was buying Spanish covered bonds. Perhaps this explains the outperformance of the MIB and IBEX.

The euro was under pressure as traders continued to speculate what additional measures the ECB might be looking to take to spur growth. The rumour mill has been in overdrive on what the ECB may or may not do and this has really been the main driver of price action. Additionally ECB member Mr Nowotny acknowledged that corporate bonds can expand the balance sheet and this fanned speculation that it is a possibility. However, he didn’t quite say it’s a step the ECB is ready to take and said no decision had been made yet. Investors also continue to speculate on results of the bank stress test results, which are due out on October 26.

Later today we have a raft of PMI releases out of Europe and unless we see a halt in the recent run of declining PMIs, euro selling and buying in equities could continue. EUR/USD is just not finding any support at the moment and I feel a retest of October lows in the $1.2500 region is on the cards.

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