Market to open lower following Fed comments

Market to open lower following Fed comments

By Miguel Audencial (Sales Trader, CMC Markets)

The Australian equities market is expected to open significantly lower today after the US Fed announced that it may put the brakes on its current quantitative easing program as early as the latter part of this year. The weaker Australian dollar, which dropped sharply over night, is likely to stretch the sell-off. I anticipate international investors will see any assets based in the Australian dollars as out of flavour at present. Weaker gold and crude oil prices overnight are also likely to cause the materials and energy sectors to underperform.

The US Fed reiterated that the timing of the scale back of the current bond buying program is dependent on the level of the unemployment and inflation rates. The market was already aware of this because it has been announced several times in previous FOMC statements. What caught the market off guard is that the Fed anticipates the pace of recovery in the labour market to be quicker than what the market previously predicted. Consequently, the possibility of scaling down the current bond buying program is likely to be sooner than what is currently priced in.

While he provided a general time frame on when the scale back of the current easing program is likely to start, Bernanke still left it open ended. Uncertainty was still present which would likely induce volatility in the market in the short to medium term. As volatility increases, investors usually lower the price they value assets which is another reason for the sell-off displayed in various markets last night.

There are a number of important economic data to be released in the next 24 hours. The Flash Manufacturing PMI figures are due for China, France, and Germany. In the US, unemployment claims, existing home sales and the Philly Fed Manufacturing Index are scheduled to be released.

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