Global Markets Overview – 12/18/13

Rounding out the RBA's year

Trade in the US remains very cautious, and so quiet you can hear the wind blowing through the trader stalls as tomorrow morning's announcement from the FOMC inches closer.

One thing I can predict is that it won't be this quiet tomorrow. My colleague Chris Weston has written a playbook on how to approach the Fed meeting and I have attached it to this email.

However, for Australian investors, today is likely to see a rounding out of the year for the RBA. Glenn Stevens is due to testify in front of the Standing Committee in Canberra, which will contain an interesting snapshot of the current state of affairs and his views of 2014.

This year the RBA has taken a further 50 basis points out of the official cash rate to go with the 175 basis points it has slashed since November 2011. The monetary easing has certainly started to filter down, with clear signs the pick-up in residential dwellings is developing, however it is slightly concerning that it is very Sydney-centric.

Business investments indicators are pointing to increased activity over the coming year, although this too is coming from a low base and could quickly change as revenue growth remains below par, meaning profit growth has come from cost-cutting not cost-expansion.

One of the biggest shifts in RBA communication this year has been its finessing of the currency. The AUD remains stubbornly high and above a 'comfortable level'. I believe that today is likely to be the pinnacle of the finessing communication ploy, as Stevens goes for the jugular in his Standing Committee testimony.

He has to front run the Fed today; he will be erring on the side of caution with the expectation of 'no change' to the US monetary stimulus program that will be announced tomorrow. The obvious market response here is USD weakness, and this could unwind all the work the board has taken over the past three months to push the AUD lower.

However, this is not the only thing I want to hear from Stevens' testimony today. The interest rate outlook will be key; jawboning only works for so long and if the Fed doesn't come to the party soon, which macro-prudential tools will he use to move the AUD and the below trend growth story? I would also point out that inflation is a sluggish 2.2% to 2.3%, even with interest rates at record lows.

The scope for further moves are there, and if the forward-guidance in business investment slows and we see earnings underperforming come February's earnings season, growth will remain below trend - another point the RBA continues to highlight.

His testimony will move the currency - that's a given - what I want to see is his 2014 outlook for rates and forward guidance, as this will move equities.

Ahead of the Australian open

The quiet night in the US looks like following through to Asian trade, with the ASX pointing down five points to 5098, despite the fact that ANZ and WBC will pay out their dividends today and tomorrow.

It was a fairly negative night for commodities across the board with iron ore down a further 60 cents to US$134.30 a tonne, having been $139.80 a tonne last week, while Nymex and gold also found trouble ahead of the FOMC announcement, with both losing ground.

However, BHP's ADR is showing positive signs and is suggesting BHP could add 12 cents to $35.78 this morning, however I would be cautious here as negative or no news is likely to drag on the miner as it is seen as a risk stock.

It will be a very quiet trading day as most finalise their positions ahead of the Fed meeting; tomorrow however will be a very different story.

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