Global Markets Overview – 4/10/14

FOMC minutes show dovish default setting

We witnessed more green on screen for the US equity markets overnight as the FOMC minutes beat down any thought of an early rates rise in the Fed funds rate.

The minutes also bluntly outlined that the 'increase in the medium projection overstated the shift in the projections' as the market starts to prepare for hawkish tones. The concern was expressed regarding rate forecasts as it 'could be misconstrued as indicating a move by the committee to a less accommodative reaction function'.

The last statement has several inferred meanings. That forecasts are not static, they are fluid guides; trigger data such as unemployment and inflation are important but must be working together rather than in opposite satellite orbits, and the default setting of the Fed is to the dovish side.

This is a clear USD weakness event and the AUD, CAD, EUR and GBP (all of which have solid long cases at the current point in time) jumped on the fact the Fed funds rate will remain at or near historic lows for at least the next 18 months. The Fed will remain accommodative as the US still sees a lower credit, higher saving environment.

With the Australian market making a new, near enough to six-year closing high yesterday, the news out of the US will be very positive for a market that finally broke out of its month of range trading. What is interesting is where today's strength is likely to be seen. The financials are actually lagging their six-year highs from the November peak and will be looking to close the gap on the open today as the risk of the yield trade unwind has now diminished on the Fed minutes. Watch the banks particularly as they are lagging in the sector.

However, Australian employment data at 11.30am AEST will be highly influential to the overall market performance. The RBA continues to point to green shoots in the economy and it is looking for the non-mining sector to pick up the slack from the slowing mining space. As a service-based economy, if job growth carries through from last month, it is seen in the service side of the economy. The consumer discretionary, staples and health care sectors could push the market through 5500 points.

It is also a long event for the AUD as 94 cents looks ripe for the picking if unemployment holds at 6% and the employment change sees a further positive read of 5000 jobs added or more.

Remaining in the Asian region, and just as important to the strength in the AUD and the material space is China's trade balance today. The China growth story remains convoluted; with several officials coming out overnight and stating that the PBoC is unwilling to slow the rate of its current fiscal program and is not concerned with the current reduction in output. This means infrastructure projects will be more influential than ever; therefore raw imports should have increased over the past month and is an area to watch as the Chinese look to stabilise and increase domestic demand. BHP has outperformed the market by almost 9% since the March low and will be a key driver again today if the Chinese trade data surprises.

Ahead of the Australian Open

With the US markets bouncing back and the fact that the strongest correlated market to the ASX is the Japanese futures, the index looks like crossing the 5500 point mark on the open for the first time since June 10 2008. We are currently calling the ASX up 48 points on the 10am bell (AEST) to 5508, as the bulls regain control of the index.

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