Originally published by CMC Markets
Volatility returned to global markets last night courtesy of a couple of well-timed central bank speeches likely to increase opportunities for active traders.
As expected, Janet Yellen’s speech last night did not deviate from the Fed’s clearly enunciated plans. These are to gradually reduce monetary stimulus if economic conditions continue to develop as they expect. It’s clear the Fed believes it will be able to remove stimulus without doing any harm for a while yet. A weakening US dollar and stubbornly low bond yields are helping with this.
However, persistently low inflation remains a threat to this scenario with markets clearly expecting that the Fed will be constrained by the risk of entrenching low inflation expectations as we move into 2018.
The greater surprise for markets is the changing outlook on how soon the ECB and, potentially, the BOJ may begin to taper stimulus. Mr. Draghi’s comments last night fuelled this expectation when he noted that the improving economic recovery may require the ECB to adjust policy simply to maintain a constant stance.
The net effect of last night’s speeches by Yellen and Draghi has been to reinforce a view that markets are now embarking on a phase of global policy tightening with the ECB potentially moving faster relative to the Fed than many had expected. This outlook drove changes in a number or markets last night.
Bond yields rose and equity markets fell with the largest moves being in high value momentum sectors like US tech stocks that are most vulnerable to increased yields.
In an ominous sign for the Nasdaq Index, last night’s selling confirmed completion of a 78.6% Fibonacci retracement. From here a break below support at 5633 would add to the chart outlook for a deeper correction.
In this context, the S&P/ASX 200 may outperform with bank stocks already having been sold off and resource stocks benefitting from a rally in commodities. The most vulnerable sector of our market may also be the high value momentum stocks that have been market darlings recently.
Last night’s central bank speeches also drove moves in currency markets with the euro rallying and the US Dollar generally weaker. This helped support gains in commodity prices which together with yesterday’s rally in the sport iron ore price will help support mining stocks today.
Last night’s rally in the oil combined with news that the API survey will show a surprise increase in inventories, sets up for a potentially volatile session tonight. Markets now have potential to be very sensitive to the official EIA inventory and production data.