Anyone expecting a decidedly risk off tone going into this week’s Fed meeting will be thinking again, with markets seeing very positive price action. As mentioned before, the market continues to climb the wall of worry and one by one the macro issues holding the bulls back are being priced out.
Life with Larry Summers at the helm would have potentially been very different from life under Ben Bernanke; it’s these uncertainties that keep markets held back. In theory if Larry Summers had got the job, we could easily have seen Janet Yellen step down from the Fed and return to academia, which would have had negative ramifications on the composition of the Fed in Q2 2014, with the board not just losing a key note dove, but also its last voting female. This has now changed, and while we know Donald Kohn has been interviewed, if Janet Yellen doesn’t get the job there could be an outcry given a large number of democrats and certainly market participants have been campaigning for her appointment.
In an ideal world Ben Bernanke would stay on, but the fact that back in June President Obama publically spoke out that Ben Bernanke had stayed on ‘a lot longer than he wanted or was supposed to’, suggests that probability would be extremely low. There was also rumour that Tim Geithner could be talked into taking the job, but he was quick to come out today and say he wouldn’t take it. You have to think Janet Yellen will get the job and thus the prospect of easily the most market-friendly outcome for the Fed chairman’s role is being celebrated in the markets today.
The prospect that an even more dovish chairman at the helm of the world’s most pivotal central bank is seeing shorts being covered and new longs initiated across the board, except in the oil complex, which continues to price out Syrian tensions. Emerging markets are seeing positive flows, which again is testament to the belief that the Fed will be more inclined to keep the reflation trade alive, although there is some selling of the Indonesian rupiah, but that is the exception. The prospect of interest rates staying lower for longer is the equity bulls’ dream, and thus S&P futures have flown out of the gate, putting on 1.1%; if the S&P 500 cash market was to open now we would expect it to open a mere three handles from a new all-time high, while European markets also look strong.
(Daily chart of S&P 500)
In FX land the USD has been offered, with AUD/USD hitting a high of 0.9399, GBP/USD 1.5958, EUR/USD 1.3382. AUD/USD needs to close above supply between 0.9330 to 0.9354 and then could push to 0.9400, where we’d expect a number of funds to cut back on longs. The fact that the Chinese market is having a breather today after a solid run from June is possibly taking some of the wind out of the risk on sails. Cable at 1.60 is incredible, and despite being overbought is in a very strong uptrend it should be supported on pullbacks. Out of all the stories that have occurred in G10 currencies, had you told us at the beginning of the year that EUR/USD would be at 1.34, GBP/USD 1.5950 and AUD/USD 0.9350 (off the lows of 0.8848), we probably would have been shocked at all three calls, although cable would probably take the title.
Japan’s cash market has been closed today, although futures have been open and up a touch, although price action has been held back by moves in USD/JPY, which is trading through the 100-day moving average at 99.04. The ASX 200 has put on 0.6% (5248), closing below the May 15 pivot high of 5249.6. Perversely, gains have been seen in the energy space, although the materials sector is gaining 1%. Volumes in the Aussie market haven’t been great though, with A$1.9 billion traded. There has been modest buying of the banks, with price action hardly thematic of a market concerned that offshore funds have been shorting them again.
As mentioned, European markets looks set to fly and the mix of Janet Yellen at the Fed’s helm, promising numbers in the Bavaria elections and further diplomatic momentum in Syria are clearly assisting sentiment. It promises to be an action packed day, with Mario Draghi speaking in early trade, while on the data side we get Italian (July) trade and current account balance, eurozone CPI and in the US empire manufacturing and industrial production.
The market’s main focal point will be on Janet Yellen as Fed chairman, with a strong focus on moves in the US bond market, where the cash market has been closed today due to the Japanese holiday. As things stands the futures market suggests a move lower across the curve, with the ten-year treasury likely declining when it opens at 16:00 AEST (07:00 GMT).