Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
Fed remains data dependent
While US equities were mixed on the back of the Fed minutes, Asia has had a favourable response. A stronger US dollar has played a big role in some of the key regional markets with the ASX 200 and Nikkei managing to post solid gains. While the Fed’s minutes essentially took a June rates lift-off possibility off the table, the US dollar still managed to rally against the majors. Essentially, the Fed said it will not be hiking until it has clarity on how a mixture of transitory and longer-lived factors are influencing growth. As a result, the Fed will be assessing data for a few more months before making a call. Fed members felt it is unlikely that the data available in June would provide sufficient confirmation of a rebound. This data dependency mode has not only erased the possibility of a June lift-off but also cast doubt on a September lift-off. Without a noteworthy bounce in Q2 as yet, it’s really hard to make a call of when to expect lift-off. It’s been made clear that the first rate hike will be determined on a meeting by meeting basis and depend on the evolution of economic conditions. There were a couple of hawkish comments, larger wage gains in some regions and core inflation may have firmed. This perhaps helped the greenback remain bid.
Greenback maintains momentum
The USD rose across the board with all crosses experiencing some big moves. EUR/USD dropped below $1.1100 (although it has since recovered), AUD/USD dropped below $0.7900 and USD/JPY pushed through ¥121.00. Japan is in a good position right now and after the Nikkei traded at a 15-yr high yesterday, it managed to extend these gains today. Data out of Japan continues to show some positive signs and today it was manufacturing PMI which came in well ahead of estimates and showed strong signs of rebounding. Meanwhile, China produced another underwhelming HSBC manufacturing PMI reading of just 49.1. Unsurprisingly, this was greeted by good buying in equities as it naturally sees investors price in the probability of more stimulus being delivered. The ASX 200 has also managed to surge today with US dollar plays in the healthcare space and energy plays leading the way.
Weaker start for Europe
Ahead of European trade, we are calling the major bourses relatively flat despite renewed weakness in the single currency. There are a raft of manufacturing and services PMIs set to be released across Europe and those numbers will help shape sentiment. Equities managed to edge higher yesterday despite a spike in bond yields and I suspect investors might be cautious around this fact today. Comments from the European leaders meeting in Riga will be closely monitored although a solution on Greece is not expected. There is also an ECB conference where President Mario Draghi is expected to speak along with a few Fed members. Out of the US we have unemployment claims, flash manufacturing PMI, existing home sales and the Philly Fed manufacturing index. As a result, we could see further volatility in US dollar crosses.