Taper fears are a 'known known'

All the talk this morning is about the US booking its worst day since 24 June – which at the time led the ASX to hit the year-to-date low on 25 June.

The S&P 500 and Dow Jones both fell 0.6% overnight as US Federal Reserve 'taper fear' rose. This is slightly counter-intuitive though, because tapering is a 'known known'.

The reason it’s being reported is that Dallas Fed president Richard Fischer last night said ‘the Fed was closer to slowing bond purchases and warned investors not to rely on stimulus’. While Atlanta Fed president Dennis Lockhart stated that if current employment trends and economic growth projection hold true, the ‘removal’ of asset purchases by the Fed should processed.

Again these views are 'known knowns' – the Fed has made it clear that tapering will happen and that the complete cessation of monetary stimulus is expected by mid-2014. Bu the moves last night are not just down to these news headlines.

One other factor that will put last night’s US trade in perspective, volume turnover of $4.35 billion is the lowest booking of the year. It is the start of August and typically this is one of the quietest trading months of the year in the US. Investors and traders alike are taking well-earned holidays. It is also the end of earnings season in the US, most bottom-up views are now factored into share prices and markets will now bunker down until the next quarterly news due out in mid-September. This will mean macro news will move markets more than usual over the coming month, as volume will be light with investors away from their desks.

Here in Australia, earnings season is just kicking off. Yesterday saw DOW and COH producing mixed results. What was clear at the close of business; guidance looks to be key. DOW’s FY13 results were solid but FY14 looks to be rocky. COH’s FY13 results were slightly weaker than forecast, but FY14 guidance was slightly rosier than expected. DOW finished in the red, COH in the green. Will this be the trend for the next month?

Something that may cause some slight optimism for material plays over the coming days is the release of China trade balance. The reasoning for the slight optimism is the correlation between Taiwanese and Chinese exports. The two trade very closely, with the Taiwanese results being a leading indicator for Chinese exports. What we have seen since June is an uptick in exports from Taiwan; if the correlation holds true expectations are for a net positive on the export side – something that should add support to the Australian material plays heading into earning releases. 

Moving to the open, we are calling the ASX 200 down 18 points to 5087 (-0.35%) as it follows the US global lead. Earnings season continues this morning, with FOX and Flexigroup releasing full-year figures. Tomorrow sees Telstra and RIO which will really get the ball rolling.

The drop in US trade and taper fears saw a negative impact on commodities, barring oil. This has led to a drop in BHP’s ADR, which is suggesting the stock should contract by 40 cents today to $35.22 (-1.12%) even though iron jumped back up towards two-month highs of $131.40 per tonne. 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. 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. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.