Global Markets Overview – October 27, 2014

Global markets are focusing on Europe this morning as results from the ECB's stress tests were finally released. The results were relatively in line with expectations despite announcing an overall gross capital shortfall of €24.6 billion. This equates to around 0.2% of the region's GDP and was spread across 25 banks. Regardless, the main takeaway was the fact some banks have already embarked in some recapitalisation and this has reduced the shortfall to a mere €9.5 billion (from 13 banks) which was relatively in line with estimates. The stressed banks are concentrated in Italy, Greece, Portugal and Ireland while Austria is the most stressed among the core countries. Overall the market seems to have found this report quite credible and given the ECB is already engaging in recapitalisation activities and other measures, then perhaps investors will remain at ease. Overall the impact on the FX space has been quite limited with the major FX pairs relatively sidelined this morning. Perhaps we might see more of a reaction in European trade later today.

Fed meeting in focus this week

Turning away from Europe, focus this week is likely to be primarily on the US where the FOMC meeting is set to take place. There has been plenty of speculation around this meeting as the asset purchase program comes to an end. The ultra doves will be hoping for a delay to the end of purchases but this outcome is highly unlikely. There has also been talk around the removal of the timeline reference to lift off when it comes to rates. Should the 'considerable time' reference be removed, then this would be highly supportive of the USD and negative for equities. With UIS data continuing to nudge higher, then any suggestion of data dependency on rates is likely to be interpreted as hawkish. The yen's weakness has continued with USD/JPY remaining above ¥108. Key inflation readings for Japan are due at the end of the week and following last week's inflation concerns, a disappointing reading this week will also fuel stimulus talk. As a result I feel USD/JPY and the Nikkei will be outperformers this week. Ahead of today's open, we are calling the Nikkei up 1% at 15440.

Banks likely to drive the ASX 200

Asia looks like it will ride the positive momentum from Friday's US session with most of the major bourses pointing higher. The ASX 200 is facing gains of around 0.5% with our opening call coming in at 5440. Once again it'll be all about the banks this week as earnings and dividends approach. Any dips are likely to be used as an opportunity to buy. It'll be interesting though to see if materials will come under pressure due to the switch to some of the banks or if investors will have enough resolve to hold on. There are a couple of AGMs to look out for with Spotless and Karoon Gas in focus.

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