Chris Weston, Research Analyst, IG
It’s all about Ben Bernanke and we thoroughly expect him to align his narrative with that of his compatriot in the core of the Fed, Bill Dudley. The market will always pay close attention to Dudley, Yellen and Bernanke as they are permanent members and effectively have the last say. Bill Dudley was clearly dovish yesterday, and we thought it interesting that he compared the Fed to the BoJ through the years, suggesting the Fed shouldn’t do too little. Importantly, Dudley said he wasn’t sure which way the future direction of asset purchases will go – either up or down. Of course this will be data dependant and we feel this is exactly the same path that the Fed Chairman will take in US trade today.
Clearly Ben Bernanke will defend the board’s current accommodative stance, while probably highlighting the costs and benefits of asset purchases. We wouldn’t want to be too long USDs going into this event, and clearly a number of macro funds have already closed USD longs in anticipation of dovish rhetoric. Of course if the Chairman does signal that dis-inflation is not a concern (similar to Williams, Evans and highlighted in the recent Wall Street Journal article), then watch the volatility come alive. We feel the market is now probably earmarking the September meeting as to when the Fed reduces the pace of buying from $85 billion to say $60 billion, but any clues today could really see the USD come alive, helped by a strong rise in treasury yields. Still, this isn’t our base case and we expect the Chairman to suggest that the Fed can increase and decrease purchases, in-line with Bill Dudley’s comments and the recent statement.
The FOMC minutes (out four hours after) will probably be hawkish, similar to previous minutes over the last few months. Given the recent narrative from hawks Lacker, Plosser and Fisher, clearly these views will play into the rhetoric. As a general rule, the actual FOMC statement simply quotes the voters, while the minutes include the views of the non-voters, many of whom are hawks and keen to see the pace of asset purchases tapered earlier than later.
Asia has been fairly quiet, with many sitting on their hands ahead of Ben Bernanke’s testimony, while Hong Kong has been offline due to storm warnings for most of the day. We saw the BoJ’s announcement early (13:07 AEST), which has been the trend when it details limited new policy initiatives, and while expectations were low, no new news was released. As things stand, Japan equity traders don’t seem too concerned by the lack of action from the BoJ in terms of addressing the volatility in the bond market. This should however be detailed in Mr Kuroda’s post-meeting conference (scheduled at 16:30 AEST) and many feel the bank could detail more on front-loaded purchases, provide clarity on upcoming JBG buy-backs, or potentially even increase funds in the kitty for bond-buying.
The ASX 200 was dealt a blow on the back of the poor Westpac consumer confidence numbers, which fell 7% on the month. Clearly the Aussie consumer is not in a good space, despite an out-of-consensus rate cut of late. Looking at the breakdown, there was a 13.4% decline in where consumers see the economy in one year ahead, while there was also a 3.9% drop in current conditions. The financial sector broke down and headed lower immediately after the release, presumably on the view that consumer credit is likely to stay subdued, despite the premise for more rate cuts. Materials have led the way as traders closed shorts ahead of the Bernanke testimony in the hope that a dovish stance would be re-iterated and cyclicals could benefit. China is up 0.5% as well, which is also helping.
AUD/USD has traded in a range of 0.9828 and 0.9780 and continues to look heavy above 0.9800. We still feel moves up to the former uptrend drawn from the 2011 low at 0.9865 will be sold and we’d be surprised if the pair made a stronger move above parity anytime soon.
Europe will probably be focused on the UK today, with the raft of data seen out today. Cable fell to 1.5113 yesterday and we’ve seen an element of short covering today from traders, although the bias is for lower levels with 58% of our client base short at present. We have liked cable shorts in the last week or so, and still feel the pair will go lower from here, with traders looking to sell rallies. Today we get retail sales, BoE minutes and public sector net borrowing, and weak number should help the trade. Earnings are thin on the ground, with HP the one to watch. However, of course price action in most asset classes will depend on what the Fed Chairman has to say.
Ahead of the European open we are calling the FTSE at 6792 -11, DAX 8457 -15, CAC 4029 -7, IBEX 8455 -9 and MIB 17460 +33