Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
Fed holds the key
Traders are cautious on the eve of the FOMC meeting as they continue to look for some direction from the Fed. This is quite interesting though, considering the Fed has done a lot to improve communication to the market. Perhaps the fact this meeting will contain the statement, projections and of course Janet Yellen’s press conference is playing a big role in keeping traders cautious.
We know the Fed is in data-dependant mode given there have been signs of an improving economic picture after a lacklustre Q1. To be fair, the Fed had highlighted time and time again that transitory factors were mostly to blame for the weakness in Q1.
As a result, the bounce back is something that had already been envisaged. What we may see today is an acknowledgement of the pick-up in data, which could see the Fed being a little more optimistic about the economy.
While lift-off is absolutely on the cards at some point this year, a point of contention will be the projected path of policy. Some analysts feel the Fed could lower its dot plot projections for 2016-17 and that would be construed as dovish. Needless to say, if the Fed leave its projections for the Fed funds rate unchanged (0.625%), this could be construed as hawkish.
The market is quite accustomed to market-friendly rhetoric from the Fed and, given Janet Yellen’s tendency to exercise caution in her tone, it seems some investors are happy to buy into equities. In fact, the S&P tends to rally when we have Janet Yellen press conferences.
Perhaps this is also why we’ve been seeing a slight pullback in the greenback with the US dollar index actually 0.4% lower from the prior FOMC meeting. However, it’s hard to say whether this was purely a US move as we’ve also seen some surprising euro strength lately.
Another camp feels the Fed wants to keep the option of hiking in September alive and as a result there might not be any major changes to projections. In such a case, a more upbeat assessment of the economy is likely to be accompanied by a data dependant approach.
Good day for ASX 200
The ASX 200 outperformed the region today, with a decent amount of volume going through. It seems domestic investors are ignoring some of the noise in global markets at the moment, focusing on value to be found in the domestic market.
However, the buying remains skewed to the banks and I suspect this will continue to be the case heading to end of FY. Reports Warren Buffet is considering buying into one or more of the big four banks also seem to have got some investors excited. While this is the case, the levels he’ll be looking for are likely to be much lower than where the banks currently are to maximise value.
Woolworths has dominated headlines after announcing a host of job cuts and resignation/retirement of the CEO as the business struggles. Well one thing the market seems to love is change and job cuts resulted in WOW shares trading higher on the back of the news before pulling back.
Greek saga continues
Ahead of European trade we are calling the major bourses mildly firmer despite a lack of progress on the Greek front. Greek PM Alexis Tsipras continued to ramp up the rhetoric after saying the current plan is humiliating for Greeks.
Thursday midnight has been pinned as the deadline for a deal and Finance Minister Varoufakis indicated Greece does not intend to present any new proposals at the Thursday meeting. Given this meeting is where most investors have pinned their hopes of a solution, markets could be in for a big surprise.
Some traders are growing increasingly impatient with euro shorts at the moment given the pair just manages to remain steady. Risk appetite it seems needs to be increasing if EUR/USD is to sell-off, which plays into the idea that the EUR is the key funding currency in the market. A further escalation in the Greek drama seems inevitable, however the irony it seems is this isn’t actually EUR bearish.