Tapering fears weigh on risk assets

We finally started seeing some moves in global markets as investors reacted to the FOMC minutes release.

Crucially, the Fed indicated that market expectations of the future course of monetary policy both with regard to asset purchases and with regard to the path of federal funds rate appeared well aligned with their own expectations.

The Fed certainly seems to have mastered the art of keeping the market guessing. While the minutes didn’t give any fresh clues on when we can expect tapering, and essentially re-emphasized what we’ve already heard from the Fed and various Fed members, it still resulted in a broadly firmer greenback. Investors concentrated on the fact that the minutes showed broad support for the tapering timeline already given by Fed chief Ben Bernanke.

As a result, the only way forward is to continue closely watching US economic data for clues on how soon we can expect tapering to start. Most analysts still expect tapering to start in September, or at the bare minimum a September announcement and implementation through October and November. However, some contrarian analysts actually see the non-committal minutes as a sign that the Fed will take its time to evaluate markets and the economy before pulling the tapering trigger.

US treasury yields were in a fairly broad range and eventually closed up 8 basis points at 2.89% after having traded as low as 2.81% just to add to the confusion. Risk currencies were offered against the USD, with sharp reversals in the euro and the AUD against the greenback. EUR/USD dropped from above 1.34 to lows in the 1.333 region. The single currency will be back in focus later today with various PMI readings for the region due out. AUD/USD lost the 0.90 region and printed a low of 0.897 at the end of US trade. It is a fairly big day for risk assets in the region, with China’s HSBC flash manufacturing PMI reading due out. AUD/USD looks like it might test the recent low of 0.8848 in the near term. The AUD has become the market’s preferred proxy of expressing emerging market risk, given around 70% of all exports go to Asia.

The Indian rupee hit a new all-time low against the greenback yesterday, despite measures by the government to stem the falls, while announcing it was buying long-dated bonds to push yields lower. At 11:45 today we get China HSBC flash PMI and the market anticipates a slight improvement in the contraction, with a print of 48.2 expected. A miss on this reading could send the AUD lower.

Ahead of the open we are calling the ASX 200 down 0.7% to 5,063. We feel keeping an eye on emerging market currencies and indices makes more sense than ever; after the big spike in US yields overnight we could see further stress, despite measures from individual central banks to curb the rapid falls.

Earnings will be in focus today, particularly with around 24 companies set to report. This makes it a very busy day on the earnings front and we feel Fortescue Metals (FMG) will be the most significant report today. We’ve already heard from BHP and RIO, with both miners slightly disappointing the market. The market expects a strong increase of revenue by FMG to $8.2 billion, with NPAT anticipated to print $1.2 billion. As with BHP and RIO, traders will be keen to look out for on-going costs, while also keeping an eye on commentary around Solomon and an update on the TPI sale process.

BHP extended its losses in London and its ADR is pointing to a 1.1% fall to 35.33. Other big stocks reporting today are ASX, AWC, AGO, CAB, ORG, PNA and BXB. There are also a number of stocks trading ex-div, like Santos.

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