A quick recap: The tension is palapable in markets as we grind down toward the FOMC’s decision at 4am Friday AEST. In the lead, volume traded on markets has lightened which is what we saw in the US on Friday as all three big indices finished around half a per cent higher, rallying into the week’s close. European stocks were lower however.
It’s a similar story here at home as well. The 200 index fell around half a per cent Friday on what was a collapse of volumes traded on the ASX, to around $2.6 billion from the usual $4-$4.5 billion. With no real reason to take a big position before the FOMC, we’ll likely see traders exercise their option to do nothing until Friday. Having said that though, futures rallied 25 points on Friday night and the Chinese data over the weekend might get things moving a little today.
In other markets, the big news was the Goldman Sachs call that oil is going to head down to $20 a barrel. That helped knock oil down around 2.5%. Gold is becalmed, copper is staying firm and iron ore was mixed along the curve Friday.
On forex markets, the US dollar lost some of its mojo with the euro back up above 1.13 and the Aussie dollar closing in on 71 cents still. Sterling is holding under 14.55 even though BoE MPC member Weale said rates will need to rise in the UK sooner rather than later.
The overnight scoreboard (7.45am AEST):
- Dow Jones Industrials +0.63% to 16,433
- Nasdaq Composite +0.54% to 4,822
- S&P 500 +0.45% to 1,961
- London (FTSE 100) -0.61% to 6,118
- Frankfurt (DAX) -0.85% to 10,124
- Tokyo (Ni even thoukkei) -0.19% to 18,264
- Shanghai (composite) +0.07% to 3,200
- Hong Kong (Hang Seng) -0.27% 21,504
- ASX Futures overnight (SPI December) +25 to 5,078
- AUDUSD: 0.7088
- EURUSD: 1.1335
- USDJPY: 120.52
- GBPUSD: 1.5425
- USDCAD: 1.3257
- Nymex Crude (front contract): $44.63
- Copper (US front contract): $2.46
- Gold: $1,108
- Dalian Iron Ore (September): 488 (denominated in CNY)
- US 10 year bond rate: 2.19%
- Australian 10 year bond rate: 2.72%
Now the news. “China’s mixed bag of economic news from the weekend failed to inspire much of a reaction this morning, despite headlines abound of fixed asset investment falling to the lowest levels since 2000. A better-than-expected retail sales number helped provide an offset.” That’s the take of the BNZ’s Wellington-based strategist Raiko Shareef after seeing the price action on FX markets so far this morning. He’s right – on the one hand, Juliana Roadley from CommSec on ABC Newsradio this morning talked up the August retail sales, which did better than expected with a 10.8% gain against the 10.5% forecast. But industrial output and fixed-asset investment both undershot expectations with a print of 6.1% and 10.9% respectively.
– At least the Chinese data will give us something else to talk about other than the Fed today and the lack of trading that is happening in the lead up to it. It’s unfortunate that this meeting is a Wednesday/Thursday one, not the usual Tuesday/Wednesday one because that’s an extra 24 hours of “do nothing” for traders. It’s also an extra 24 hours of calming do nothing for strategists and market commentators to write about. BUT, that’s worth talking about because when traders are uncertain about a big event, and volumes reduce, the chances for a big reaction grow. That itself is enough to worry traders, which means that volumes can reduce even further and positions held in a more short term manner and with less conviction. This combination has a dampening impact initially on trade but trade can quickly transition from low to high volatility very quickly. All we need is a catalyst – which of course the Fed is on Friday morning. In the meantime though, traders will be watching the wedge in the S&P 500 closely.
– That wedge pattern is mainly one that technical traders watch and it is one that generally fits with the idea that markets will not move a lot in the next few days before the FOMC. That suggests our own ASX shouldn’t move too far either side of Friday’s close either in the next few days. But should the US market break either way, global markets, including our own, will likely follow suit. But as technical traders know, it has to break first. Unless or until the wedge breaks, higher or lower, traders have a lovely excuse to do nothing.
– The debate about whether the Fed will or won’t tighten this week continues between analysts across the globe. Westpac’s chief economist Bill Evans is firmly in the camp which says the Fed should tighten this week. Writing in his excellent Australian and New Zealand weekly, Evans said:
We expect the US Federal Reserve to start raising rates next week (the first time it has instigated a tightening cycle since June 2004). The market is not prepared for this historic event.
We have been forecasting that the FED would start raising rates in September 2015 for around two years. It has been a long wait and, despite market pricing only giving a 30% probability to the hike occurring, we are sticking with the view.
I’m with Bill, it’s time for the Fed to act. But many others including ‘bond god’ Jeff Gundlach, reckon the Fed should sit pat. Analysts at Morgan Stanley’s interest rate research team tend to agree and have published a great research note which highlights the 4 options they think the Fed has and the probability they ascribe to each outcome.
– On Forex markets, the US dollar is likely to remain under pressure in the lead up to the FOMC decision on the basis that no tightening is good for every other non-USD currency. That’s what has helped euro up above 1.13 and that could be what helps the Aussie up into the high 71 cent region over the next couple of days. But like other markets, forex traders will be looking for excuses not to do anything as opposed to the usual situation where they search for reasons to trade.
– On oil, Mike Bird from BI UK reported Friday that Jeffrey Currie, the head of Goldman Sachs’ commodity research, published a report saying oil was going to $20 a barrel. That’s the most bearish call out there at the moment. Currie said:
The oil market is even more oversupplied than we had expected and we now forecast this surplus to persist in 2016 on further OPEC production growth, resilient non-OPEC supply and slowing demand growth, with risks skewed to even weaker demand given China’s slowdown and its negative EM feedback loop… While not our base case, the potential for oil prices to fall to such levels, which we estimate near $US20/bbl, is becoming greater as storage continues to fill.
That’s a view supported by the break of a 16-year uptrend in oil. Significantly, for the bears, the price broke back up and to this big trendline before reversing again and heading back down, Here’s the chart:
– There is no data in Australia today. Offshore its also fairly quiet with the release of Japanese industrial production, Swiss import prices and retail sales, Italian CPI and EU production.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
This week’s Fed decision could be definitive for gold and puts the chart of gold miner, Newcrest, in an interesting place.
After forming a base in early August, Newcrest’s share price has been oscillating within a trading range. At the moment, it’s dropping sharply towards the support, having gapped lower over the past couple of days. Continuation of this trend with a clear break below the support would look bearish from a chart point of view.
However, in what could be a volatile week, the opposite scenario is worth keeping in mind. Another bounce off this support line would look positive; setting up for a return to the channel resistance or, potentially, a break to the upside.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC
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