Global Markets Overview - 1/30/14

Risk unwound through European and US trade as the overwhelmingly positive reaction to Turkey's aggressive hike proved to be short lived. The central bank theme continued with the Fed meeting in focus where it decided to taper by a further $10 billion, taking monthly purchases down to $65 billion as expected. Once again the $10 billion will be equally split between treasuries and mortgage-backed securities (MBS). The commentary didn't change much with the Fed noting an improvement in the labour market and reinforcing its commitment to keep rates low. Most analysts now expect the Fed to just continue tapering at a steady pace of $10 billion in coming meetings, unless conditions significantly deteriorate. This was also Ben Bernanke's last meeting as Janet Yellen takes over as chair.

With the Fed remaining on course to scale back on asset purchases, the drastic measures taken by emerging market central banks to stabilise their currencies proved to be short lived, as the tapering outcome put them on the back foot yet again.

After having dropped to a low of 2.16 in Asian trade yesterday, USD/TRY reversed sharply to print a high of 2.32. While liquidity in TRY is relatively low, this was still quite a drastic shift. The pair is still hanging at around 2.26 with volatility continuing. In further evidence that emerging markets are in turmoil, South Africa's central bank also hiked rates by 50 basis points, but this didn't prevent the rand from sliding.

Nikkei to drop sharply

The Reserve Bank of New Zealand surprised some by keeping rates on hold, but judging by the lack of any sharp moves in the NZD, the move was mainly priced in. Judging from the statement though, a tightening seems like it isn't far off. Yen strength was a dominant theme in the emerging market chaos as it even managed to put on gains despite the Fed's decision to taper. This is a clear sign that investors are after safety at the moment.

USD/JPY slipped to 101.80 and remains vulnerable heading into Asian trade. The gains in the yen will put the Nikkei under significant pressure today. We are currently calling the Nikkei down 2.4% at 14,951. There hasn't been much going on with the AUD, but perhaps import prices data and China's final HSBC manufacturing PMI print will drive some volatility.

Risk-off theme locally

Ahead of the open we are calling the local market down 1.2% at 5165. We are likely to see a risk-off theme dominating trade due to the tapering decision and chaos in emerging markets. Apart from gold, the commodity space was mainly weaker and this will probably put the resource space on the back foot. BHP's ADR is pointing to a 1.4% drop at the open to 36.35.

Iron ore has continued to drop heading into the Lunar New Year break and this will not bode well for the iron ore plays. Atlas iron will be an interesting one to watch after a big gain yesterday on the back of positive earnings. So far the stock has already been upgraded to hold (from sell) by Deutsche Bank and to neutral (from sell) by Citi. Beach Energy has a 2Q output report today, while Fortescue Metals has a 2Q production report. There might be some bright spots in the defensive space, particularly the healthcare space which might get a USD lift.

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