The Fed holds the key

Traders are cautious on the eve of the FOMC meeting as they continue to look for some direction from the Fed.

Source: Bloomberg

This is quite interesting though, considering the Fed has done a lot to improve communication to the market. Perhaps the fact this meeting will contain the statement, projections and of course Janet Yellen’s press conference is playing a big role in keeping traders cautious.

We know the Fed is in data-dependant mode given there have been signs of an improving economic picture after a lacklustre Q1. To be fair, the Fed had highlighted time and time again that transitory factors were mostly to blame for the weakness in Q1.

As a result, the bounce back is something that had already been envisaged. What we may see today is an acknowledgement of the pick-up in data, which could see the Fed being a little more optimistic about the economy.

While lift-off is absolutely on the cards at some point this year, a point of contention will be the projected path of policy. Some analysts feel the Fed could lower its dot plot projections for 2016-17 and that would be construed as dovish. Needless to say, if the Fed leave its projections for the Fed funds rate unchanged (0.625%), this could be construed as hawkish.

The market is quite accustomed to market-friendly rhetoric from the Fed and, given Janet Yellen’s tendency to exercise caution in her tone, it seems some investors are happy to buy into equities. In fact, the S&P tends to rally when we have Janet Yellen press conferences.

Perhaps this is also why we’ve been seeing a slight pullback in the greenback with the US dollar index actually 0.4% lower from the prior FOMC meeting. However, it’s hard to say whether this was purely a US move as we’ve also seen some surprising euro strength lately.

Another camp feels the Fed wants to keep the option of hiking in September alive and as a result there might not be any major changes to projections. In such a case, a more upbeat assessment of the economy is likely to be accompanied by a data dependant approach.

Good day for ASX 200

The ASX 200 outperformed the region today, with a decent amount of volume going through. It seems domestic investors are ignoring some of the noise in global markets at the moment, focusing on value to be found in the domestic market.

However, the buying remains skewed to the banks and I suspect this will continue to be the case heading to end of FY. Reports Warren Buffet is considering buying into one or more of the big four banks also seem to have got some investors excited.

Woolworths has dominated headlines after announcing a host of job cuts and resignation of the CEO as the business struggles. Well one thing the market seems to love is change and job cuts resulted in WOW shares trading higher today.

Greek saga continues

Ahead of European trade we are calling the major bourses mildly firmer despite a lack of progress on the Greek front. Greek PM Alexis Tsipras continued to ramp up the rhetoric after saying the current plan is humiliating for Greeks.

Thursday midnight has been pinned as the deadline for a deal and Finance Minister Varoufakis indicated Greece does not intend to present any new proposals at the Thursday meeting. Given this meeting is where most investors have pinned their hopes of a solution, markets could be in for a big surprise.

Some traders are growing increasingly impatient with euro shorts at the moment given the pair just manages to remain steady. It seems risk appetite needs to increase if EUR/USD is to sell-off, which plays into the idea that the EUR is the key funding currency in the market. A further escalation in the Greek drama seems inevitable, but the irony is that it seems this isn’t actually EUR bearish.

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.