Trader’s thoughts – Wall Street grinds higher on dovish Fed minutes

The bullish week continues:

The pointy end of the week has arrived, and so far, the news flow is lining up well for the bulls. The big release, perhaps for the whole week, was this morning’s FOMC Minutes. Naturally, the information is old, relevant mostly to the December 19 period in which the central bank met. But given the market turmoil experienced since then, along with January’s nascent recovery, this set of Fed minutes has taken on slightly greater significance. The reception, as far as investors and other bulls are concerned, has been positive. The document reveals a much more dovish Fed than the one that Chairperson Jerome Powell presented at that meeting’s press conference. The Powell-put is in, it is being judged: the market has Fed support.

Confidence boosted by dovish Fed:

That’s the perception, anyway. It could change but considering sentiment has vacillated recently on shifting “narratives”, a rosy outlook is apparently enough to pique risk-appetite. Combing through the fine-print of the Fed Minutes and few details jump out. Confidence about future growth has waned very slightly, and the need for higher interests has come into question. In fact, a few members voiced their belief the Fed should have kept rates on hold at the December meeting. The board also highlighted the disconnect between financial markets and the “real” economy, though it did add that downside risks to the US economy had increased. Without quoting line for line, the document contains the nuanced and market-sympathetic tone the bulls have been waiting for, vindicating this week’s upside turn in global equities.

Market response:

The response by traders has been to buy stocks and bonds, sell the US Dollar, and seek out other risk-on-assets. At time of writing, about an hour-and-a-half before the closing bell, the comprehensive S&P 500 is dancing with the 2600 pivot point. Note: it was that psychological-level of support the market bounced off twice before beginning its dive into bear market territory. US Treasury yields have also dipped. The US 10 Year note has fallen by 1 basis point to 2.72 per cent; however, the yield on the more interest rate sensitive US 2 Year note has plunged 4 basis points to 2.54 per cent. Credit spreads, especially on junk bonds, have narrowed further, supporting equity markets, and risk-appetite in general.

The Greenback tumbles:

The US Dollar has maintained its fall consequent to the FOMC Minutes, which it must be stated, experienced the lion’s share of its overnight tumble after a speech from Fed-member Raphael Bostic, after he’d stated that he believed interest rates were very close to neutral. The greenback looks vulnerable to further falls now, having retreated already by 2.3 per cent from its December highs. Gold is looking increasingly in vogue courtesy of the weaker USD and the absence of other appropriate currency safe-havens, climbing to $US1292. While the AUD/USD, having broken resistance at 0.7150 during Asian trade yesterday, is continuing its march towards 0.7200 support/resistance, even despite traders pricing an increased chance of RBA rate cuts at some point in 2019.

In other news:

Of course, the FOMC minutes, though certainly the biggest event in the last 24-hours, wasn’t the only news moving markets. Oil prices rallied by over 4 per cent last night on data showing crude inventories contracted in the US, along with greater expectations that OPEC’s recently announced production cuts would lower global supply. The dynamic has supported the lift in equity markets, aided the narrowing of credit spreads, and pushed-up the yield on US 5 Year Breakevens, as traders re-price for higher inflation. Positive noises coming from US-China Trade negotiations also improved the outlook for growth, adding to the week’s positive momentum toward a trade-war resolution. The only major dark-point thus far this week has been the ongoing US Government shut-down, which is showing no signs of ending any time soon.

ASX at crossroads:

SPI Futures are pointing to a jump at the open for the ASX 200 of 13 basis points, at time of writing. Much like the S&P 500, the ASX200 sits just shy of a key pivot point for the market, between about 5780/5800. The market yesterday attempted on several occasions to breakthrough that level, only to find any such challenged faded. The ASX is still trading primarily on the lead handed to it by Wall Street, and if that relationship holds true today, a play above the 5780 level ought to be on the cards at the market’s open. From here, a close above 5800 will be hoped for by market-bulls, to validate a change in the short-term trend, and subsequently open upside to ~5950.

The state of play today:

The data-docket is light in the Asian session ahead. The positioning in markets today will largely be concerned with a speech scheduled to be delivered by US Fed Chair Jerome Powell tonight. The tide does feel to be turning in equity markets. Volatility is lower, and the bulls have had delivered to them what they’ve been crying for: good data and a dovish Fed. Debate will continue to rage between the bulls and bears about where markets go from here. The former suggests the worst of the shake-out is over, a bottom has been put in place, and there is more upside to come; the latter points to historical precedent to suggest we are just experiencing a bull trap, and the bear market has only just begun.