– Markets loved the FOMC decision to hold rates steady. That’s even though the Fed, and chair Janet Yellen in her press conference, signaled rates are more likely than not to rise this year and perhaps even twice.
– Why stocks and bonds rallied while the US dollar sold off is best summarised by Akin Oyedele from BI US who wrote this morning that “The Fed’s outlook for inflation was unchanged, with the Fed expecting ‘core’ inflation to be between 1.3%-1.4% at the end of the year. The Fed cut its forecast for GDP growth to 1.8%-2.0% from 2.3%-2.7% in March. The Fed also raised its unemployment expectations to 5.2%-5.3% from 5.0%-5.2%.” The market read that as dovish – which means they expect the Fed to be more than less aggressive on rate hikes.
– That meant that the Dow, S&P and Nasdaq, which were all down before the announcement, ended up in what can best be characterised as choppy trade. Part of that is that the Fed said the economy can withstand higher rates but some of the enthusiasm was likely tempered when Yellen said the FOMC “cannot promise there will not be volatility… but we can promise to communicate clearly about our policy and our expectations”. She added that it is “hard to have great confidence in predicting what market reactions to Fed decisions will be”. But one of the more enlightening comments and something that will inform debate if the economy continues to strengthen was that Yellen admitted NY Fed President Bill Dudley was right and the Fed was too slow to raise rates between 2004-2006.
– Bonds, which had been in selloff mode in the US before the FOMC decision, rallied strongly to close just up one point in the US where the 10s finished at 2.32%. They had been as high as 2.39% at one point. German Bunds finished at 0.81% and UK 10-year Gilts ripped higher to 2.08%.
– In Europe, stocks were all down as the Greek tragedy continued. Last night the Greek Central Bank weighed in with a plea which Ambrose Evans-Pritchard in the UK Telegraph characterised as “a last plaintive scream before the axe falls, as if delivering an Aeschylean curse”. That’s after the bank said “Failure to reach an agreement would mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country’s exit from the euro area and – most likely – from the European Union.”
– That’s bad news for market sentiment as Yellen highlighted when, in answer to a question on Greece, she said there was the “potential for disruptions that could affect international financial markets” and there “undoubtedly would be spillovers”. Equally bad news were Reuters headlines that Bundesbank president Jens Wedmann seem unconcerned about the chance of Grexit. He noted, correctly, that if a political deal can’t be reached then the ECB can’t finance the Greek banking sector but said that the euro’s survival doesn’t depend on Greece. Like Yellen, he added that the consequences were hard to control and contagion couldn’t be ruled out.
Here’s the overnight scoreboard (7.32am AEST):
- Dow Jones up 0.17% to 17,935
- Nasdaq up 0.18% to 5,064
- S&P 500 up 0.2% to 2100
- London (FTSE 100) down 0.44% to 6,680
- Frankfurt (DAX) down 0.6% to 10,978
- Paris (CAC) down 1.02% to 4,790
- Tokyo (Nikkei) down 0.19% to 20,219
- Shanghai (composite) up 1.66% to 4,968
- Hong Kong (Hang Seng) up 0.7% to 26,753
- ASX Futures Overnight (SPI June) -1 point to 5,581
- US 10 Year Bonds +1 points to 2.31%
- German 10 Year Bonds +1 points to 0.81%
- Australian 10 year bonds -1 point to 2.97%
- AUDUSD: 0.7749
- EURUSD: 1.1346
- USDJPY: 123.43
- GBPUSD: 1.5826
- USDCAD: 1.2229
- Crude: $59.73
- Gold: $1,184
- Dalian Iron Ore (September): 426
– The local market finally broke up and through the 200-day moving average yesterday with the ASX 200s rise of 1.1% fueled by strong rallies in the major banks. The debate about value continues with one prominent fund manager sitting on a cash haul of 43% of his fund. On the other hand, Warren Buffett is buying. Value, like beauty, is in the eye of the beholder.
– In Asia, it was another wild ride for traders in Shanghai. Down at 4,767 in morning trade, the market then commenced to rally ending at 4,968 up 1.65%. Amazing price action. But without any fundamental drivers, traders defer to technicals and you can see exactly why the buyers came back into the market in the chart below. Interestingly, the volume yesterday was much lower than the selling volume, which might be a pointer to further falls. Particularly if the trendline breaks.
– On forex markets, the US dollar came under heavy selling pressure with the euro up toward the top of the current range. Sterling has been the best performer up almost 2 cents against the US dollar after breaking a one-year downtrend on the back of stronger than expected wages growth. That puts the BoE in play and probably not too far behind the Fed. The Aussie ripped higher as well and is looking like a test toward 78 cents might be back on the cards.
– On commodity markets, crude was down a little, Dalian iron ore largely unchanged, copper remains weak and no one seems to be excited about gold.
– On the data front today, there is little of interest in the way of economic stats out in Australia but the RBA bulletin might have some interesting research in it. Chinese house prices are out and then the SNB has a monetary policy decision tonight. Retail sales in the UK will be important for the pound and then US CPI tonight is huge.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Woolworths was in the news yesterday but the Wesfarmers chart is also at an interesting place. While not beaten up to the extent of the Woolworths share price, the owner of Coles is nevertheless well below its February peak and has now retreated to the extent that it’s testing potential trend line support. If this support can be confirmed by a bounce off this level then, from a chart point of view, a rally to test the trend line resistance above $47 looks possible.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC