Fed rates realigned to 2015 expectations

With Janet Yellen holding firm on a December rate hike expectation during her testimony to Congress on Thursday and then the massive beat from the non-farm payrolls (NFP) on Friday , 2015 has been realigned with the beginning of the year’s expectations of at least one rate hike.

Fed fund futures for December are now at the highest chance of a hike this year at 69% while most economists that are holding off have reworked estimates for the December meeting as the month for lift-off.

What is also interesting from this realignment is the markets have not thrown a ‘tantrum’ or gone into ‘hysterics’ – yet. Time will tell, but the orderly movements of the NFP on Friday suggests the market will take a small increase to the Fed funds rate in its stride.

What’s catching my attention

· USD was up against all of the G10 over the weekend – which is not surprising. The biggest mover was AUD/USD – the strong NFP coupled with the horrible Chinese trade balance data (Australian imports were down 25% in October) sees the pair at 70.5c.

Since 13 October the AUD has lost 3.3 cents. There is a jaws effect here, which is placing huge pressure on the local currency: a strong USD, a commodities currency with high exposure to China, and growth expectations that are being revised lower. Asian traders this morning are already shelling AUD in droves. An AUD with a ‘6’ handle at the end of the week is not out of the question.

· China has seen two technical bull markets and a technical bear market in 2015, with two months still left to go. Will the economic slowdown or the increased likelihood of policy easing see the score line staying as is or finishing 2-2?

· US earning season has come to an end with the headline, ‘Worst earnings season since 2009’. This is slightly misleading considering only one sector has really dragged the whole season down – materials. Earnings beat expectations 71% of the time, which is the norm. Revenue, however, was sub-50% for the first time in six years, thanks mainly to energy and materials.

I wrote on Friday that top line growth will be the single most important factor in the coming two years for global corporates as ‘steam lining’ firms is a finite option. Earnings growth quality is currently being stretched to the limit across the globe and investors are becoming more and more interested in how firms will increase the top line number.

· BHP was smashed in London on Friday , down 5.75% on the dam collapse in Brazil. Interestingly the reaction in Australia to this news was nowhere near as extreme but will it catch up today? BHP’s ADR suggests so, however the actual impact on BHP’s earnings from the collapse are not as high as this move would suggest.

· Iron ore fell another 50 cents on Friday to the lowest level since 9 July at $48.21 a tonne and Brent fell to $47.42 down 1.2%. This does not bode well for materials, energy and the AUD. Coupled with the news from China over the weekend, the ASX is likely to be put on the back foot.

Ahead of the Australian Open

Ahead of the open we are calling the ASX down just 14 points to 5201. This suggests the industrials will be doing the heavy lifting to offset the expected slide in commodity and energy plays.

Asian markets opening call

Price at 8:00am AEDT

Change from the Offical market close

Percentage Change

Australia 200 cash (ASX 200)

5,201.40

-14

-0.26%

Japan 225 (Nikkei)

19,453.10

188

0.98%

Hong Kong HS 50 cash (Hang Seng)

22,779.60

-88

-0.38%

China H-shares cash

10,482.60

-73

-0.70%

Singapore Blue Chip cash (MSCI Singapore)

338.14

1

0.24%

US and Europe Market Calls

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

WALL STREET (cash) (Dow)

17,895.50

34

0.19%

US 500 (cash) (S&P)

2,098.72

-2

-0.08%

UK FTSE (cash)

6,374.30

-4

-0.06%

German DAX (cash)

11,023.90

122

1.12%

Futures Markets

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

Dow Jones Futures (December)

17,849.00

48.00

0.27%

S&P Futures (December)

2,093.63

-1.00

-0.05%

ASX SPI Futures (December)

5,197.00

-27.50

-0.53%

NKY 225 Futures (December)

19,487.50

170.00

0.88%

Key inputs for the upcoming Australian trading session (Change are from 16:00 AEDT )

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

AUD/USD

$0.7027

-0.0115

-1.61%

USD/JPY

¥123.225

1.380

1.13%

Rio Tinto Plc (London)

£22.90

-0.09

-0.39%

BHP Billiton Plc (London)

£9.75

-0.60

-5.75%

BHP Billiton Ltd. ADR (US) (AUD)

$21.88

-0.82

-3.61%

Gold (spot)

$1,089.60

-18.75

-1.69%

Iron Ore (62%Fe Qingdao)

$48.21

-0.39

-0.80%

IG Iron Ore (CNH)

¥336.55

-3.20

-0.94%

IG provides round-the-clock CFD trading on currencies, indices and commodities. The levels quoted in this email are the latest tradeable price for each market. The net change for each market is referenced from the corresponding tradeable level at Friday’s close of the ASX. These levels are specifically tailored for the Australian trader and take into account the 24hr nature of global markets.

Please contact IG if you require market commentary or the latest dealing price.

EVAN LUCAS Market Strategist
IG Markets

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