A quick recap: What a wild night.
– The Fed passed on moving rates. Its dot point chart highlighted it still intends to do something this year, but it said that it is monitoring developments abroad, and Janet Yellen presided over a rather dovish and somewhat aggressive press conference.
It combined into a night where US stocks drifted higher, spiked then reversed, leaving the Dow and the S&P 500 closing in the red while the Nasdaq eked out a small gain. The impact of that was to leave Aussie dollar and ASX SPI futures traders with spinning heads.
– The Aussie had its wildest morning in years on the Fed announcement, rising a cent and then giving it all back. Over at the ASX it was a little of the same with the December SPI opening last night’s session at 5,107, hitting a high of 5,184 (up 1.5%) before it reversed course as traders around the world re-evaluated what the Fed meant, or was trying to convey. That saw the Dec SPI close at 5,106, down 1. That suggest that traders in Australia might be a little disappointed in trade today. It also put at risk the topside break in the US we saw yesterday, which will also increase the nervousness.
– In many ways though, the big news of the day was the remarkable move in US interest rate markets. With the Fed thinking that inflation is going to remain quiet, US 10s dropped 10 points to 2.19%. But it was the rally in 2-year treasuries which fell from 0.82% to 0.68% which was the most remarkable move of all overnight. I need to check my charts, but I think it’s the biggest move in quite a few years. In capital price, it’s worth 17%. Imagine if the stock market moved that much in a couple of hours.
– Elsewhere, while the Aussie and other commodity bloc currencies were hammered back from their highs, the euro, sterling and yen were all stronger. Euro made a gain of more than 1%. Crude oil is back a little at $46.90, gold knows a weak US dollar when it sees one and is up at $1,190 while copper is up a little as well.
The overnight scoreboard (8.08am AEST):
- Dow Jones Industrials -0.39% to 16,674
- Nasdaq Composite +0.1% to 4,893
- S&P 500 -0.26% to 1,990
- London (FTSE 100)-0.68% to 6,186
- Frankfurt (DAX) +0.02% to 10,229
- Tokyo (Nikkei) +1.43% to 18,432
- Shanghai (composite) -2.10% to 3,086
- Hong Kong (Hang Seng) -0.51% to 21,855
- ASX Futures overnight (SPI December) -1 5106
- AUDUSD: 0.7168
- EURUSD: 1.1416
- USDJPY: 120.10
- GBPUSD: 1.5576
- USDCAD: 1.3173
- Nymex Crude (front contract): $46.90
- Copper (US front contract): $2.47/li>
- Gold: $1,130
- Dalian Iron Ore (January): 388 (denominated in CNY)
- US 10 year bond rate: 2.19%
- Australian 10 year bond rate: 2.75%
Now the news. There are lots of column inches being written about the Fed and this morning’s decision. It appeared to me, as someone who thought they should have gone, that the focus on “developments abroad”, while convenient at this juncture, will hang like Damocles sword over future meetings. It seems I’m not the only one. Here’s the take from Emma Lawson, the NAB’s Sydney-based currency strategist:
The statement was relatively unchanged, but the addition of “monitoring developments abroad” cued markets as to the cause for the delay. The commentary on the labour market and inflation were relatively unchanged, and show a level of comfort with their path. Indeed, the median forecasts for unemployment were lower, while the outlook for the core PCE (the Fed’s favoured inflation rate) were only marginally lower. So it is the uncertainty surrounding global demand, and volatile EM in particular, that is holding them back. The argument goes that this volatility and growth concern strengthens the USD and lowers oil prices; both of which lower inflation and make it more difficult for the Fed to achieve their inflation target.
The thing to note is the circularity of this problem: they don’t hike because EM is under pressure, EM is under pressure because the Fed is going to hike, the Fed doesn’t hike, EM rallies, the Fed turns hawkish again, EM comes off – and so it may go. We need a circuit breaker; hopefully one to the upside, not the downside of the risk spectrum.
What she said.
– Looking at US 2 year bonds now and there is no denying that the market clearly had a view that the Fed was going to go this morning and hike rates. How else do you explain a move of 17% of capital value and a rally of 0.14%? The point, of course, is that it was not only the 2s that rallied – the 10s did as well. But crucially, the Fed fund futures seem to have now made next year – rather than the October or December meetings – the favourite point of liftoff for US interest rates. That has forced the term structure of interest rates around the world lower. Aussie 10s fell 12 points, while the 3s dipped 8. That’s important for stock valuations over time. Anyway, here’s the remarkable chart of the US 2-year note overnight:
– In terms of stocks in the US, and of course the impact this will have on stock markets globally, the technicians might be getting a bit antsy after watching the price action of the past couple of days. The question in their mind is after the break higher and then reversal over the past two days, whether this is a sign stocks are about to head lower. It’s a question, not a fact, but here’s the chart many will be looking at:
In terms of trade in Asia today, the SPI, and other futures suggest we are going to have a mildly negative day.
– On the data front today, the RBA governor Glenn Stevens will front the House of Reps Standing Committee on Economics in Canberra this morning. The BoJ releases its minutes from the last meeting, China releases its house price index and in Canada tonight we get the CPI.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
The market’s biggest stock goes into today’s session parked right at potential resistance as investors decide what to make of the Fed non-event.
The blue resistance line on the chart below needs to be rejected here to be confirmed. If CBA rallies straight through, it would really need to take out the “double bottom” resistance to indicate a bullish break out of the recent trading range.
However, if the share price falls away from here it will confirm the potential for a wedge or triangle pattern. This could ultimately end up being a bullish basing pattern in the CBA chart.
To confirm this view of life, the CBA chart would need to reject the wedge support or levels just below it another one or 2 times before eventually rallying to break out of the pattern to the upside.
For potential buyers of CBA, this could be a useful development providing opportunities to buy around the wedge support area.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC
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