Global Markets Overview – December 18, 2014

Fed language hits the spot

US equities surged on the back of the Fed meeting, which seems to have hit a sweet spot as far as balancing expectations is concerned.

It was always important for the Fed to get the language right so as not to spook markets at such a fragile time and it seems it has done just that. While the Fed removed the 'considerable time' reference, it replaced this by saying it can be 'patient' - it seems this was enough to keep the hawks at bay.

However, the greenback rallied against all the majors, suggesting the market feels we remain on track for a hike mid next year. Essentially, we've now moved to a data-dependant approach (as opposed to a timeline reference) and, judging by the way data has been tracking, there is a good chance lift-off is still on track.

The dot-plot analysis is perhaps what was a minor concern for the hawks, with a downgrade to inflation and the Fed funds rate for the 2015-to-2017 period marginally lowered. However, GDP was upgraded slightly with lower oil prices likely to help underpin growth. Additionally, there were three dissenters - namely Fisher, Plosser and Kocherlakota.

The future of policy has now been firmly pinned on inflation which continues to run below the committee's 2% goal. With oil price behaving the way it has recently, some feel this suggests we won't be seeing a rush to lift-off. However, it's important to remember lower oil prices are a net positive for the economy and will eventually lead to rampant growth.

Greenback reverses higher

The sharp reversal in USD/JPY will be the highlight for Asia as it is likely to trigger a recovery for the Nikkei. Japan has struggled all week in the aftermath of the elections, with the yen strengthening significantly against the greenback. The pair dropped as low as ¥115.56 yesterday and is now back at ¥118.84. This has resulted in a rally in Nikkei futures and we are currently calling Japan up a whopping 2.5%.

AUD/USD has been in a downward spiral ever since it broke below the $0.8200 handle yesterday. The pair is now testing $0.8100 and today we have China's November property prices to look out for. Judging by the way it has been going in past months, this data is likely to show further weakness. This could be a trigger for further AUD selling in Asian trade. In May 2010, AUD/USD traded as low as $0.8067 and that could be a potential near-term target.

Local equities to rally

Ahead of the local market open we are calling the ASX 200 up 1% at 5223. The question will be whether the momentum from US trade will be enough for the local market to brush off concerns around weakness in some of our key commodities like iron ore.

Energy plays recovered significantly yesterday and it'll be interesting to see if this run can continue. There are a few AGMs to look out for, including NAB and Graincorp. From NAB, there will be plenty of interest around the recent UK loan sale and the future of the rest of its UK assets. Shareholders are likely to give a tick of approval to the new CEO Andrew Thorburn and his drive to get things done.

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