Pre-FOMC boost to equities

It seems like traders are throwing caution in to the wind, as they buy into Asian equities ahead of the FOMC meeting.

Janet Yellen
Source: Bloomberg

It could also just be a recent phenomenon ever since Federal Reserve Chair, Janet Yellen, took over the reins.

We noted that 80% of the time, markets tend to rally when she gives a press conference.

This could partially be that the market is accustomed to the typically market-friendly tune hummed by the Fed.

Whatever is the reason or observation, the market is anticipating a probably dovish slant from the Fed.

What we could see is an acknowledgement of recent signs of an improving economic outlook, and by extension optimism about the pace of US recovery, while simultaneously, a lowering of the dot plot prediction for 2016-17.

This expectation is perhaps why we’ve seen some pullbacks in the USD during the Asian session. Needless to say, the Fed will, at some point in its press conference, emphasise the data-dependent posture.

It is worthwhile to note that given some divergence in market views, it seems logical that if the current projection is kept unchanged at 0.625%, it would send a strong message that the US central bank will look to lift the Fed funds rate in September.

China markets overcame early sellers making a strong comeback, reversing the decline seen in the previous two sessions. The CSI 300 index rebounded 1.5% where we see traders buying into banks, energy and utility counters on prospects for accelerated reforms in the State-owned Enterprises (SOE) sector. The government allowed a mixed ownership structure for Bank of Communications.

Separately, GD Power may become the first power producer to receive a license to sell electricity, according to a Securities Times report. Meanwhile, the ChiNext Index also shook off bears to jump more than a 4% bounce.

I still feel that Chinese equities will settle into a near-term consolidation phase given recent developments, including tighter margin financing, possible decrease in liquidity, and lofty valuations.

In Singapore, the Straits Times Index (STI) made a strong rebound back above 3300, climbing over 1%. The Index rallied almost 50 points at one point, with eyes on the 3350 handle. Today’s rebound was mostly across the board, as over 75% of the STI components chalked up gains. However, despite the bounce, the reality is that STI remains largely within the recent consolidation band of 3300-3350. Attempts to break either side of the range were not sustained.

Euro remains resilient

It is baffling to see EUR staying relatively support despite all the negative headlines on Greece. Traders with short EUR/USD positions are getting impatient with the reluctance of the common currency to move lower, and Wednesday’s FOMC could be the trigger for a fresh downmove.

A more hawkish Fed may do the trick, alongside increasing risk appetite for EUR/USD to go down. This plays into the idea that EUR is a key funding currency in the market. However, what’s ironic is that while a further deterioration in the Greek drama seems imminent, a potential play of ‘it gets worse before things get better’ situation, it is not exactly EUR bearish.

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