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Market behaviour to be tested

There is a large diversity of behaviours across global markets currently.

All trading involves risk. Losses can exceed deposits.

The ‘great rotation’ trade has been the major trade option on the ASX as commodities have heated up. Europe has snapped out of recession (if one positive quarter can do that), driving consumer optimism higher. While the US is currently experience very sticky trading conditions as holidays, ‘uneven data’ and taper talk are pushing the S&P and Dow in all directions, leading some to very childish behaviour.

It is the US market we should be concentrating on and particularly the final two points from above. The US markets will alter global trading over the next 30 days - taper talk is only going to get louder and louder, to a point of deafening. This will lead risk markets such as equity indices to start throwing the toys out of the monetary stabilising pram in the coming weeks.

The Fed members are starting to align on taper talk; Charles Evans, Sandra Pianalto and Richard Fisher (Fed presidents from Chicago, Cleveland and Dallas respectively) are in the camp of ‘taper can happen’ sooner rather than later. They don’t specifically state when, but considering 65% of the economists surveyed by Bloomberg expect tapering in September, it reiterates that the next 30 days heading to the September meeting will be volatile.

What may actually cause increased volatility are comments from Atlanta president Dennis Lockhart regarding timing. His comments suggested policy makers may start tapering at ‘any of the next few meetings amid uneven performance for the economy’.

He is indeed correct in the unevenness of the data, and last night is a prime example; unemployment claims fell to its lowest print in six years, signalling the Fed’s unemployment targets maybe get closer. This drove the USD higher in morning trade; then poor data from the Philly Fed manufacturing index, industrial production and the Empire State Manufacturing Index drove it the other direction, leaving currency traders slightly dazed and confused. This saw the equity markets chucking the toys out with the bath water; seeing the markets dropping 1.45% their worst performances since June.

This uneven data call and timing issue is backed up by St. Louis Fed president Jamie Bullard. A well-known major dove; his comments regarding when to taper are what we base our October calls on. The following statement summarises his view; ‘a press conference should be added to the October meeting so that the FOMC can choose to taper at any of its three remaining meetings this year, the Committee still needs to see more data on macroeconomic  performance in the second half of 2013 before making a judgment on tapering’.

We have been of the belief that language and communication are key to how the Fed will handle this very sticky issue. After Ben Bernanke’s Freudian slip at the May 22 meeting, which caused mass volatility, the communication from the FOMC has been crisp, rehearsed and very precise.

They have struck an almost perfect accord between the bulls and the bears on rates, to see Fed future fund rates for June 15 holding firm. The next part of the puzzle is very sticky; trying to moderate concerns about monetary tapering, and allowing the market to understand exactly when, how and by how much the FOMC will move that.

As no major plans have been laid out to the markets, we believe the September meeting will lay out a blue-print as to how taper will occur for the first move in October. It will give the Fed a chance to gauge market reactions and tinker with the plans accordingly heading into the October meeting.

So time is ticking; the markets will certainly try to do whatever they can to hold onto the monetary stimulus milk bottle. Tantrums will be thrown in the next 30 days; the question will be if the Fed folds to the toddler demands, or if it will put the markets in the naughty corner and get on with the job.    

Moving to the local open, brace yourselves for a very bumpy ride to end the week. We are calling the ASX 200 down 30 points to 5122 (-0.58%), however the last time the US markets had a disorderly fall like last night the ASX responded by falling 1.85% (on August 7). Although ANZ and Santos are releasing sales updates and earnings today, it does appear they could be drowned out.

From a technical level it looks like the market will test the top of the last fall of 5116. If it can hold above this level it will be a very positive sign. However, if it falls below 5116, BHP will have to do some very heavy lifting at Tuesday’s release to hold the market back from a correction.

BHP’s ADR is suggesting the stock will drop on the open, down 12 cents to $37.21 (-0.31%) which will put a slight damper on what has been a stellar week for the company. The iron ore price dropped slightly last night, however it remains above US$ 140 a tonne; a positive heading into mining earnings week.

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