Well, it was worth the wait.
– The Fed’s announcement this morning at 5am Sydney/Melbourne time was perfectly pitched to achieve exactly what the Fed most likely wanted. That is, bonds rallied, the US dollar sold off and stocks reversed their earlier weakness. It’s the US dollar move which is the big one however, because the statement explicitly noted that “export growth has weakened”. Likewise, during her press conference, Fed chair Yellen noted that net exports (what the USA sells minus what it buys) would also be a drag on growth this year. That’s a clear signal the Fed wants the dollar lower. Euro has traded above 1.08 this morning – that’s a 2% rally on the day. It may not be over yet.
– Looking at what the Fed has achieved today with this statement, I have to say that in the future, central bankers will study Janet Yellen and her colleagues for the masterful way they have manoeuvred out of the bind they set themselves by hanging on the word “patient” late last year. The FOMC statement this morning was perfectly worded and the associated documents, which included the famous “dot point” chart have delivered a clear message that rates will be rising this year, but not as much as originally thought. Indeed, the Fed Median Fed Funds rate expectation for the end of this year dropped to 0.625% versus 1.125% in December. What is important about this change in rate hike expectations is that it also reflects that the Fed is watching the data, its recent deterioration, and won’t hike rates unless the economy is ready for it.
– In case you are wondering, here’s what Janet Yellen said in her press conference about what the dropping of the reference to patience meant:
Today’s modification of our guidance should not be interpreted to mean that we have decided on the timing of that increase. In other words, just because we removed the word ‘patient’ from the statement doesn’t mean we’re going to be impatient.
– So all in all, it’s a good day for stocks with the Dow up 240 points, the Nasdaq composite hit 5,000 and the S&P 500 traded above 2100. These are all amazing facts given that the Fed just downgraded its outlook for growth in the US. The power of easy money!
Here’s the overnight scoreboard:
- Dow Jones up 1.27%, 226 points to 18,075
- Nasdaq up 0.92% to 4,982 after briefly touching 5,000 this morning
- S&P up 1.14% to 2,098
- London (FTSE 100) up 1.57% to 6,945
- Frankfurt (DAX) down 0.48% to 11,922
- Paris (CAC) up 0.09% to 5,033
- Tokyo (Nikkei) up 0.55% to 19,544
- Shanghai (Composite) Far out! Up another 2.12%, 74 points to 3,577
- Hong Kong (Hang Seng) up 0.91% to 24,120
- ASX Futures (SPI June) up 29 points to 5,891
- AUDUSD: 0.7776
- EURUSD: 1.0818
- USDJPY: 120.19
- GBPUSD: 1.4938
- USDCAD: 1.2572
- Crude: $44.78
- Gold: $1,168
– The ASX should have a good day, as the futures indicate. Key here is that the overnight move has taken the market up and through the recent tight range that has constrained it. In trading terms, that will excite a few bulls and bring in some fresh ones. We’ll see if our market can hold on today. Worth noting is that iron ore absolutely tanked yesterday with prices on the Dalian exchange down markedly. Overnight iron ore futures are down more than 2% as a result.
– In Asia yesterday, the perversion of the love affair with stimulus seemed to kick Shanghai stocks higher again. Even though the rate of price decline in Chinese housing increased to -5.7% from -5.1% last month, Shanghai still ripped higher. That’s because traders simply equate weakness with Premier Li’s promise to do whatever it takes to keep the economy up. Even Australia’s Department of Industry is in on it. Yesterday, in its Resources and Energy quarterly on China, the department said:
The downturn in the Chinese property sector is expected to persist in the near term. It is reported that the government is preparing measures to assist the sector, including reducing down payment requirements for second home purchases; reducing the minimum holding period for homeowners to avoid sales tax on property from five to two years; and easing mortgage rules.
No wonder Shanghai is rallying so hard.
– On bond markets, the Fed comments have driven US bond yields lower. US 10s rallied 12 points, down to 1.93%. German 10s dipped 8 points to 0.17% after a really strong 10-year bond auction. In the UK, the release of the minutes to the BoE meeting, which highlighted concerns over inflation and the pound, pushed 10-years down 9 points to 1.62%.
– On currency markets, the Fed has ignited a US dollar sell-off which has the US dollar index down 1.66%, euro up above 1.0 at 1.0818 and sterling up at a remarkable 1.4926. That’s remarkable because earlier in the night GBP fell to its lowest level in five years after the BoE Minutes. It hit a low of 1.4635 before the Fed. The Aussie has ripped higher as well and traded briefly above 78 cents this morning.
– There is nothing like a US dollar sell-off to ignite a rally in commodities. So this morning there has been a strong rally in the price of crude, gold and almost every other major commodity except copper, which is down 2% to $2.62 a pound. Iron ore was sold heavily yesterday as noted above and Newcastle coal down 40 cents to $55.20 a tonne.
– On the data front today, the RBA Bulletin is out as are the RBA’s FX transactions but otherwise it’s very quiet in Australia. Except for the market reaction to the Fed, of course. The Swiss National Bank has an interest rate decision tonight and there are details of the ECB’s LTRO. In the US, it’s jobless claims and the Philly Fed.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
This one’s on my short term trading list
A rally above $3.97 today leaving yesterday’s low intact, would complete a minor “abcd” chart pattern in CSR. That would set up for the final CD leg of a larger pattern.
Potential targets for this would be:
• Around $4.20 where CD would end up being the same size as the AB swing and would also complete a 61.8% Fibonacci retracement of the last major decline or
• $4.30 which would be a 78.6% Fib retracement and where CD would be a Fibonacci multiple of the AB swing (127%)
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC