Japan leads on the back of the Fed

While US equities retreated on the back of the Fed, Asia has reacted somewhat differently with markets broadly mixed. 

Source: Bloomberg

Just to recap on the FOMC meeting, QE came to an end as many expected and the Fed offered up a moderately hawkish statement. The Fed did not make reference to global growth concerns as the market was broadly expecting, sounding more optimistic about the labour market and showing less concern about moderating inflation. However, the considerable time reference was maintained, but analysts feel this will go in December when the Fed also releases updated projections.

While the considerable time reference hasn’t been dropped, the Fed made enough reference to data dependency in the statement for this not to matter. As far as the rate hike is concerned, the market is now firmly in the Q2 2015 camp. The other talking point was around Fed members who dissented in the last meeting, but have since come back to the fore. Analysts have interpreted this as pointing towards a hawkish shift. In fact, Mr Kocherlakota, who is a dove, dissented as he preferred to stay with the $15 billion of purchases.

Focus now shifts to the FOMC meeting minutes which will be released in a couple of weeks’ time.  

Focus switches to the BoJ

With the Fed sounding decidedly more upbeat about the economy, yields firmed up and US dollar strength resumed after a period of consolidation. The greenback popped a bit higher and I feel there could be room for further gains as there has been a clear shift in tone. The minutes will provide more detail when they are released in a couple of weeks’ time, and traders are likely to be looking for further gains. Additionally data is likely to continue on its current path and this would be supportive of a greenback rally. Japan has perhaps benefitted the most from this today, with some good gains for USD/JPY and the Nikkei. USD/JPY traded through ¥109.00, while the Nikkei has put on gains of around 0.6%.

Focus now switches to the raft of economic releases out of Japan and of course the BoJ meeting tomorrow. This week’s releases out of Japan have actually been ahead of estimates, suggesting the negative impact from the sales tax hike is beginning to wane. Tomorrow we receive CPI data ahead of the results from the BoJ meeting. This will probably place significant weight on the CPI data as last week concerns were rife that the BoJ’s inflation goal is well off target. However, most analysts still expect the BoJ to remain patient and wait until January perhaps before pulling the trigger on further stimulus.

Banks lead the ASX 200

After a subdued start, the banks have managed to rescue the ASX 200 yet again. I feel there is risk of a near-term pullback for the local market around the 5480 region, which is this week’s high. The market has already retraced a significant portion of the recent drop and given it was driven by the banks, as we get the results out of the way, then it’ll remain vulnerable. NAB’s result has been well received and considering results had already been pre-released then I feel comments around exiting the UK assets are coming and will be the key drivers of the price action. The rest of the banking space has just continued to tear away, with ANZ among the leaders ahead of its results tomorrow. The materials space just continues to be a lag for the ASX 200 and it seems investors remain keen on high yield names and IPOs instead.

Firmer start for Europe

Ahead of the European open we are calling the major European bourses firmer, with investors getting an opportunity to react to the Fed meeting. There is a bit of data to look out for including German and Spain’s first CPI estimates, along with German employment data. EUR/USD weakness will be an interesting one to look at particularly, after renewed USD strength. Additionally, should data out of Europe disappoint today then the pair could come under further pressure. I remain of the opinion the pair will retest lows in the $1.2500 region in the near term.  

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