After yesterday’s violent price action in various asset classes, it seems US markets focused more heavily on good domestic data and the Fed Chairman than the political issues in Europe. The two basis point (bps) move to the upside in the US ten-year bond and 0.6% gain in the S&P came at a time when the USD was also generally bid against the major G10 pairs.
It seemed logical that the Fed Chairman was always going to re-iterate his dovish view and he continued with his line that the Fed will push on with low interest rates and QE until the labor market improves ‘substantially’. Still, anyone looking for new information on the timing of the much-hyped ‘exit policy’ will find little clues in the narrative. This was always going to be about pushing back on current positioning and expectations, and the Chairman’s upcoming address in front of the House Financial Services today should in theory not give too much fodder for the USD bulls either; of which we sit in that camp.
Asia has found solace in the moves in the US an1d has chosen to get back into equities again. The ASX 200 is up 0.7% and has found buyers in all sectors. Defensives have generally been better bid, although there have been some modestly higher moves in material names, helped by the slight uptick seen in commodity prices today. On an index level, the ASX 200 has found buyers between 4980-75 over the last week or so and this should continue to be the case, with both the 21-day moving average (4983) and uptrend drawn from the November low (4990) holding firm. Interestingly, the index has now been above the 21-day for 62 trading sessions (the longest for many years), so clearly this is a level that needs to hold if the market is going to take out the recent top of 5106.6 and print a higher high. We are happy being bullish as long as these levels hold in the short-term.
The Nikkei and the Shanghai Composite have taken differing paths, with the Japanese market down 0.6% on the back of USD/JPY moves, while China found buyers after the Securities Journal said regulators will encourage investment in equities and perhaps allow Hong Kong residents to buy A-share stocks. Whether the Chinese are seeing the same positive feedback loop between equities, consumer spending and ultimately the economy that the Fed does is debatable, but clearly a higher stock market never hurt anyone.
European markets should see a more subdued start than yesterday and while the Italian political issues have not materially impacted the psyche of US and Asian equity traders, it has certainly influenced forex players. EUR/USD has generally been offered throughout the day and is looking to test yesterday’s low of 1.3018, while AUD/USD looks to test 1.0201. We suggested selling AUD/USD last week up to 1.0330 and our bias is still for a test of around 1.0149; however we have now changed our bias on EUR/USD, and feel the market could be keen to sell rallies as well. A break of the January pivot low of 1.2998 could see 1.2877 (the 50% retracement of the July to February rally) come into play, while 1.3282 (the 38.2% retracement of the recent sell-off from 1.3711) could potentially be a good level to sell into with a stop above Monday’s high of 1.3319.
NZD/USD also looks poor, perhaps even more so than AUD/USD given the recent trend breaks. We’d look for the 200-day moving average at 0.8151 to come into play in the short-term (see chart below).
In terms of the Italian situation, there have been some consolatory mutterings between Luigi Bersani and Silvio Berlusconi, but this still seems quite distant and the prospect of fresh elections, either in the short-term or in six months, is still a real possibility. As detailed yesterday, there is also a possibility that a unity government is formed, although choosing a Prime Minister will be tricky. One implication the market is now getting to grips with is the low probability of the unity government applying for the ECB’s OMT (Outright Monetary Program) program. Many will argue that it never really needed it in the first place and was (and still is) in a much better position than Spain (and of course Greece). However, the fact that BTP ten-year yields fell around 250bps from Mario Draghi’s ‘will do whatever it takes’ speech in July to the January lows means it could be un-wound if the market feels the OMT program has absolutely no hope at all of ever being implemented.
The Italian bond market comes into play once again today with the treasury looking to get €4 billion in ten-year bonds and €2.5 billion in five-year bonds away. Given the spike higher in yields yesterday the underlying market is now trading 72bps (ten-year) and 69bps (five-year) higher than the previous auction, so inevitably we’ll hear that it is paying higher yields. Keep an eye on any bids to cover where the last ten-year auction saw a poor 1.32x; any number above 2x will be positive.
Elsewhere we get reads on US durable goods, pending home sales, UK GDP, eurozone consumer confidence, while Mario Draghi and Dallas Fed President Richard Fischer speak.