IG Markets - Afternoon thoughts Sept 13

FTSE 5781 -1
DAX 7345 +1
CAC 3545 +1
IBEX 7987 -5
DOW 13348 +15
NAS 2793 +1
S&P 1437 0

Oil 97.02
Gold 1731

The price action Asian session hasn’t given much guidance of what to expect from the FOMC meeting. It has been a very subdued session with mixed performances across the board. Risk appetite remained steady throughout European and US trade heading into the FOMC decision, which is due in the early hours of tomorrow. The German Constitutional Court hearing offered little resistance for the bulls as the market risk-rally continued. As expected, the Court ruled the ESM ratifications as constitutional. This resulted in a modest rally in EUR/USD, which traded above 1.29 and printed a high of 1.294. With another tail-risk event removed from the euro's path, buying the dips is likely to be the preferred strategy heading into the FOMC decision. Fed chief Ben Bernanke is widely expected to announce another round of quantitative easing. However, there is risk of disappointment in case the Fed surprises by not easing policy as much as the market expects.

AUD/USD and EUR/USD has remained near their highs from the European session. In fact we have seen these pairs drift a touch higher since the close of the US session. Equities in the Asian region have been mixed with a mild gain in Japan while China and Australia are weaker. Futures also haven’t told much of a story with European and US markets expected to open relatively flat. When trading around an event to which the market has put so much emphasis on and risk assets have already undergone a strong move, it pays to understand positioning and therefore adjust to the potential risk/reward pay-off. Ben Bernanke has built up expectations and the bulk of economists are either calling for open-ended bond purchases or for the Fed to provide clarity on a programme that holds detail on both size and duration of future bond buying. Given the good run of equities and the fall in the USD since June there is a real possibility (even if we get what we want) that a classic buy the rumour, sell the fact type event plays out.

A change of guidance with regards to the Fed funds projection seems a given, while it is also quite possible the Fed will refrain from near-term easing, but give implicit hints that asset-purchases will be coming in December or January. Therefore, under both these circumstances, we feel buying dips in EUR/USD, AUD/USD and equities could be how traders will approach this meeting. The standout risk is we simply get a change in the Fed funds projection (this is fully priced in), we don’t get a September QE announcement and the Fed gives limited clues as to future balance sheet expansion, in this case expect the USD bulls to really come to life. Given the event in question just isn’t binary and the fact there are multiple events throughout the day with the FOMC statement released first, the economic projections an hour and a half later, followed by a press conference shortly after, price action could be all over the place and clearly the first move in risk may not be the right one.

The local market, currently down 0.4%, hasn’t really moved much from its opening level. Myer has perhaps been the biggest story of the day after posting its full-year earnings. The stock is currently flat after reporting earnings which met estimates despite a challenging economic environment. However, the outlook for the company and sector remains murky and this is holding investors back from regaining confidence in the stock. Keep an eye on stocks with a lot of US exposure as they would get a kicker if the US opens the taps. The materials space is flat today with big miners BHP Billiton and Rio Tinto mildly firmer. However, Fortescue Metals is down 3.2% after having enjoyed a big recovery this week. Gold miners will also be of interest tomorrow given the sensitivity of the precious metal to QE.
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