The US markets continued their climb during the night, with the S&P closing up 0.8% at 1159, the highest close since October 1 2008.
The Dow and the NASDAQ chalked up gains of 0.4% and 0.7% respectively. Notably, yesterday was the Dow's sixth consecutive firmer day.
One point worth expanding on is the volume in US markets. While we are seeing higher highs and higher lows – key metrics in determining an uptrend – the volume or conviction behind the rally has been shocking. For the month the S&P is up 5%, at 52 week highs. However, we have only seen five of the last 16 sessions record trade volumes of over 1 billion shares, with the average being 994 million shares. The same corresponding period last year saw an average of 1.74 billion, 75% more. This goes to show there is still plenty of caution about and traders still do not really trust this rally.
The focal point of the US session was undoubtedly the Federal Reserve's monetary statement. Looking at the price action in equity, forex and fixed income markets, it left traders under no illusion that rates are going to stay low, at least for the foreseeable future. The two key areas of interest surrounded the phrase 'extended period' and whether this statement was going to generate an increase in the Fed’s dissidents.
Given we saw no change here, traders were inspired to push stocks to new yearly highs. We also saw some upgrades from the Fed with a statement that the labour market is stabilising, whereas previously they had said 'the deterioration in the labour market is abating'. The Fed also stated they would be completing their asset purchase programme this month and looking to close their emergency liquidity facility at the end of June.
Traders looking for clues as to when the Fed may start to raise rates can glance on the futures markets. According to the Chicago Board of Trade, futures prices signalled a 70% chance of a 50bp increase in November, down from 86% on Monday.
Given the Fed was more complimentary than expected about the US economy, we saw risk appetite sweep through currency markets. It pushed the US dollar down against risk currencies like sterling, the euro and Australian dollar. The euro's rally to 1.3781 was also aided by Standard and Poor affirming Greece's investment-grade BBB+ rating and dropping the country from 'CreditWatch negative'. This, combined with the weakness in the US dollar, gave rise to some stellar gains in commodities, with the S&P Materials sector the best performer, closing up 1.7%.
Across Asia, as at 05:30, regional markets are all higher after the US Federal Reserve reiterated its commitment to keep borrowing rates at exceptionally low levels for an extended period - boosting commodities and risk currencies at the expense of the yen and the US dollar. The Hang Seng and the Kospi are higher by 1.6% and 1.9% respectively; the Nikkei 225 is up 1.2%, while the Shanghai Composite is posting gains of 0.8%. A report from the World Bank about China’s growth prospect inspired the bulls into the afternoon.
Down under, the Australian market has surged back above the 4800 level, also benefitting from a renewed dose of risk appetite. The ASX 200 closed at the highs of the day up 1.2%, with the energy, materials and industrial sectors adding a bulk of the points.
Turning our attention to European markets, with Wall Street closing modestly higher, we should see Europe continue nudging its way north in the short term too. Support with the oil price – apparently rallying off the back of continued progress in the Greek debt situation – will help the heavyweight petrochemicals stocks, and this optimism isn’t damping enthusiasm for the Gold price either. UK unemployment data and the US PPI readings have the most potential to cause any upset in the day ahead given the scant level of news on the earnings calendar. There’s also the ongoing concern that options expiry on Friday could end up being the trigger for the next reversion.
Ahead of the open we’re calling the FTSE up 27 at 5642, the DAX up 20 at 5991 and the CAC up 10 at 3949.
