Clearly there is underlying strength in Australian equities, with the market seeing yesterday’s sell-off as overdone. Perhaps the slight pullback was enough to entice the yield hunters back in, with the usual suspects in the telco, healthcare and financial sectors finding buyers. Perhaps it was also down to the view that the market got the FOMC minutes wrong, and while at the margin they were hawkish there were still some clear dovish underlying themes that will see the Fed firmly in the market till the end of the year.
We know there are hawks within the Fed’s ranks, many of them non-voters and what the minutes (as opposed to the actual FOMC statement) gives is a chance for non-voters to express their view. Of course, the minutes contained hawkish rhetoric, but it seems comments that the board’s medium-term inflation and employment views are running at levels hardly thematic of any early withdrawal, which shows that many of the key personnel are happy with the status quo. Ben Bernanke, when speaking at next week’s Banking Committee meeting will look to temper expectations, and we wouldn’t want to be too long USD’s going into that. It is important to realise just how bad currency markets have been at reading these bank minutes. Take the January 3 set, when we saw strong USD inflows and subsequent equity downside, most saw the minutes as hawkish. However on second thought, when traders realised these minutes actually followed on from the December Fed meeting in which it announced a new QE program, it seems quite illogical to start talking about reigning in stimulus as the bank is announcing new measures! At least we know there’s healthy debate and it does seem logical that if the US is creating jobs at the current pace, it will be on track to achieve the sort of job growth some of the more visionary members like Chicago President Charles Evans have stipulated as the trigger to curb asset purchases. That is not a major worry for now, however, and we feel the June FOMC meeting could be the more suitable forum for the Fed to announce something more constructive. It could also be when the USD starts trading as an investment currency as opposed to its pure ‘safe-haven’ status. We see this as the trigger to open up sizeable downside risks to the AUD, GBP, EUR and CAD.
Japan has found buyers from the lows and perhaps this will be the case over the next few weeks ahead of financial year-end. Yesterday’s speculation that life insurance companies are looking to add risk to their portfolio’s continues to get attention on the floors, while the prospect of the Japanese Government Pension Investment Fund reallocating its weightings for the first time since 2004 is also helping. Again, if the ¥107 trillion fund improves its allocation (currently 67% in Japanese bonds, 11% in domestic stocks and 9% in foreign equities) towards stocks, you have to think the Nikkei will have strong support. Traders could look to take the beta out of the trade and go short S&P/long Nikkei as a pairs trade, given the threat of a bearish outside weekly reversal at the trend high on the S&P 500 (on a close below 1513) and failed break of the bearish wedge, as highlighted earlier in the week.
China made the news yesterday, and as we highlighted in Wednesday’s piece the property market has come to a head again. Perhaps the big falls were also a reaction to news that the PBOC was withdrawing record amounts of liquidity from its money markets, but today the market is flat despite news that 53 of the 70 cities (compared to 40 in December) in China saw house price increases. Still, while yesterday’s price action on the Shanghai and CSI subtracted from sentiment in Europe, perhaps today’s uneventful tape in the face of rising property prices could support.
As mentioned, the ASX 200 has had a good rejection of yesterday’s sell-off, but could not hold the highs. The key talking point was RBA Governor Glenn Stevens’ early speech, which threw-up some very interesting comments on the local unit and the bank’s current monetary policy. It seems those calling for 2% to be the trough in rates will be getting a touch hot under the collar and Mr Stevens gave some pretty direct comments that rates (as things stand) will not be going much lower. On the back of his comments the AUD/USD has regained the 1.03 level, while the market is now pricing in 6 basis points of cuts in the March meeting, down from eight just before the speech. Our earlier call to sell AUD/USD at 1.0350 was looking good and we still feel the pair has downside risks over the coming weeks.
So, with Asian markets bucking yesterday’s sell-off, US futures have found modest buyers throughout the day and our calls look very promising. It will be a very interesting session indeed; on one hand we get reads on the German IFO business climate and current assessment, with both metrics expected to improve (similar to the ZEW confidence numbers earlier in the week). However, once again we really need to see this confidence translate into actual strength in the economy and certainly yesterday’s PMI’s didn’t show that. Keep an eye on France; its economy is slowly shaping up to be the real stumbling block for 2014. The market will also get to hear more on the repayments of the ECB’s second LTRO (long-term refinancing offer), with the market expecting around €130-150 billion in loans to be repaid; a number north of this should see EUR/USD find buyers. With the Italian government and Cyprus Presidential elections over the weekend, any real upside from these data points could be tempered; notably the threat of a hung parliament in Italy. Any disappointment on the election front could see 1.3075 (the 38.2% retracement of the July 2012 to February 2013 rally) present itself as a good entry level for EUR bulls.
Sterling looks very interesting as well (see chart below)l, given it is widely seen as the ugliest kid on the block. However, the weekly chart has shown some very good strength both at the 61.8% retracement of the May 2010 to April 2011 rally and series of pivot lows. Fundamentally there’s absolutely no reason to hold sterling, however there seems to be strong bids in the market at present and someone is defending these levels.
Weekly chart of GBP/USD
Measured move of GBP/USD
As things stand we are calling the FTSE 6324 +33, DAX 7625 +42, CAC 3625 +23, IBEX 8043 +30