The Foot Off The Pedal: But No Brakes From Bernanke On The Markets

Bernanke yesterday reiterated that the Fed is prepared to increase or decrease the pace of its bond-buying as the outlook for labour and inflation change. However, citing the diminished labour market risk since autumn, Bernanke saw it possible that the Fed would “moderate” its pace of purchases later this year, with the tap that floods markets with stimulus possibly closing in the middle of 2014. Notwithstanding the above, Bernanke stressed in his press conference repeatedly that the accommodative policies are tied to the economic data, with weak future data delaying tapering.

In his attempt to appease the markets, particularly the bond markets, with the rising yields that have “puzzled” the FOMC, Bernanke clarified that tapering is similar to lifting your foot off the gas pedal, not applying the brakes. He stated that the brakes, i.e. an interest rate hike, will be applied “far in the future”, with 15 out of 19 FOMC members not seeing a rate increase before 2015. In the meantime, the Fed will be hoping that the stock of assets on its balance sheet continues to have an accommodative impact in spite of a taper or end to the purchases. Although this is consistent with economic theory in terms of supply and demand, the bond markets have not really had a textbook response to the tapering as treasuries have lost severely, with the yield on the 10-year note increasing from yesterday’s low to today’s high by 9.6%.

The initial market reaction to the FOMC statement saw major dollar gains, as the improved economic outlook and the lowering of unemployment projections for both 2013 and 2014, with the latter’s range of 6.5% to 6.8% including the 6.5% threshold level set for a possible rate hike, increased tapering expectations hitting emerging market currencies. The dovish monetary policies implemented by the Fed had investors seek yield in higher-yielding assets, particularly in emerging markets, with a slowdown in stimulus and expectations of a rate increase making long positions in emerging market currencies less appealing. As a consequence, the Mexican peso, the Brazilian real and the South African rand plummeted, inter alia, versus the greenback, with the Dollar Index gaining 0.92% since yesterday morning. Concern for low inflation, with the core PCE projections being revised downwards, was a moderating factor in yesterday’s press conference but the news did not do much to curb tapering speculation. Low forecasted inflationary pressures, however, substantially tarnished the appeal of Treasury Inflation-Protected Securities (TIPS) and precious metals, with gold and silver losing since yesterday morning 1.43% and 1.61%, respectively. U.S. equities remained initially resilient displaying volatility but a sell-off materialised towards the close with the S&P 500 shedding 1.4%.

As if the markets did not have enough to absorb following the end of the crucial two-day FOMC meeting, today sees the flash PMI day for June. China kicked-off with a much worse-than-estimated contractionary HSBC reading of 48.3 when analysts were expecting around 49.1 to 49.4 (depending on the survey), similar to May’s 49.2 figure. The weak figure follows downgrades to China’s growth forecast, as the seven-day repo rate reached a seven year high as the central bank refrained from providing the financial system with further funds. The Eurozone PMIs for June are expected to show improvements both with regard to manufacturing and services. The French Manufacturing PMI is set to come in at 47.0, a 14-month high, from the 46.4 figure reported in May. The Services PMI is forecasted to increase from 44.3 to 44.8, a 6-month high. German manufacturing PMI is due to continue with its rebound, climbing to 49.8 – 49.9 from 49.4, with the 50.0 figure in services placing a halt to the two consecutive months of contraction. The Eurozone PMI Composite is also due to improve from 47.7 to 48.1, with the manufacturing PMI increasing from 48.3 to 48.6 and the services PMI from 47.2 to 47.5. The U.S. manufacturing PMI is also set to rise from 52.3 to 52.7 – 52.8, with the Philly Fed Manufacturing survey improving, moving from -5.2 to -0.2, a day after Bernanke stressed the need for positive U.S. data in order to initiate stimulus tapering.

The U.S. data, however, do not end there with the initial jobless claims anticipated to show a slight increase from 334K to 340K, whilst staying below the 5-week average of 349K. The Conference Board leading indicator for May is due to rise by 0.2%, albeit at a slower pace than the 0.6% increase witnessed in April. The pace of existing home sales for May is set to remain steady at +0.6%, increasing the home sales from 4.97M to 5.00M.

The U.K. releases today its retail sales figures for May, with broad improvements expected. The MoM sales will likely expand by 0.8%, having shrunk 1.3% in April, with the MoM and YoY figures excluding fuel also set to show stark improvements. The headline YoY figure, though, will likely show an expansion at a slower pace of 0.2%, having increased by 0.5% in the previous month. Shortly afterwards, the Confederation of British Industry will release its survey on industrial trends, with the June figure improving relative to May from -20 to -15.

Lastly, the Eurozone is likely to attract market attention over the next couple of days with the Eurogroup and Ecofin meetings. Today the Euro-area finance ministers may come to an agreement on the €500Bn European Stability Mechanism, the Eurozone’s lender of last resort fund, which will permit the direct recapitalisation of banks, starting from fall 2014. A key issue under discussion in the summit today will be whether banks can be recapitalised via the mechanism retroactively, thus erasing some debt from struggling peripheries. Aside from the meetings, the Eurozone will be releasing its preliminary consumer confidence for June, with pessimism expected to fall to an 11-month low of -21.5, an improvement from the -21.9 May reading.

The Market

EUR/USD
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• EUR/USD’s breakdown from notable support at 1.3300, with bearish crossovers at overbought levels on the Stochastic and the RSI, sees next notable Fibonacci support at 1.3230, with weak support levels thereafter at 1.3200 and 1.3160. Significant, well tested support comes at 1.3115 with 1.3075 concentrating the 50- and 200-day MAs. Initial resistance comes at 1.3300, with further resistance at the tested Fibo levels of 1.3320 and 1.3340.

USD/JPY
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• USD/JPY was a major gainer following the FOMC announcement with resistance coming at the well-tested 97.05 level. A breakout sees next resistance significantly higher, in the 97.90 – 98.15 area, with weak trendline resistance at 98.70. Support comes at 96.40 with stronger support at 95.90.

GBP/USD
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• Cable broke down from multiple levels yesterday, losing considerably today as well. Having penetrated and tested the Fibo level at around 1.5500, the next notable level comes at 1.5420 with 50-day MA support at 1.5370, weak support at 1.5345 and tested Fibo support at 1.5315. Resistance above 1.5500 comes at 1.5550.

Gold


• Gold broke down from its pennant formation, testing trendline resistance thereafter. Weak support comes at $1340 with $1322 being the low following the April crash. Notable support thereafter comes in the $1285 - $1300 area. Resistance levels are $1353 and $1363.

Oil

• WTI broke down from $97.75 support following an unanticipated increase in crude stockpiles and the Fed’s policy announcement. Having violated the $96.95 support trendline, the next level is seen at $96.15 and thereafter at $95.65. Resistance may be seen at the previous support level of $96.95 and thereafter at $97.75.

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