Following the first of two Janet Yellen testimonies to Congress, the market read between the lines of what the Fed Chairman said when she hinted that “the Fed needs confidence on recovery and inflation before beginning to raise rates” and realized that the case of a June rate hike is suddenly far less realistic than previously expected, as a result not only did we see another blowoff top in stocks to fresh all time highs, a move which sent the USD lower, has pushed the median EV/EBITDA multiple to the mid 11x (!) range and the forward PE to just shy of 18x ironically coming on a day when the Fed itself warned about “stretched” equity valuations, and led to brisk buying of global Treasurys across the board, pushing the 10 Year in the US back under 2%, and due to the global convergence trade (because if the Fed returns to QE, it will be forced to buy up Treasuries not just in the US but around the globe, since net issuance including CBs globally is now negative) and leading to today’s German 5 Year bond auction pricing at a negative yield for the first time ever.
Then again since the breadth of the “market” is now defined by just 5 stocks which are responsible for the parabolic move in the Nasdaq in the past two months, talking about a market is no longer meaningful, and any attempts to forecast what a central-bank dominated market will do are now more futile than ever. One thing that will surely impact stocks again, will be Yellen’s second day of testimony, this time before the Senate, where her prepared remarks will be the same, however where she is now expected to be forced with more aggressive questions than the generic fluff the members of the House lobbed at her yesterday, with the possible exception of Elizabeth Warren’s demands for a “Yes or No” answer on whether Citigroup runs Fed policy now by drafting swaps push out laws.
So, to keep it easy, here is what has already happened: European equities reside in negative territory across the board albeit modestly so, with things pretty light in Europe so far this morning. On a sector specific basis, energy names lead the way lower in a continuation of yesterday’s move despite oil prices holding their own this morning. Price action nonetheless has been more defined across fixed income products with core paper continuing to rally in the wake of comments from Fed Chair Yellen whose remarks were perceived as more dovish than markets were expecting, leading to markets now pricing in a 66% probability of a FFR hike in Oct. From a UK perspective, Gilts have been outperforming in early trade as UK paper plays catch up with US and GE paper which rallied after the UK close yesterday.
Asian equity markets initially traded mostly higher after taking the lead from another record Wall Street close for the DJIA and S&P 500. However, Nikkei 225 (-0.1%) was unable to hold on to its earlier advance after fluctuating between losses and gains, amid a strengthening JPY. Shanghai Comp (-1%) and Hang Seng (-0.1%) traded lower after a mixed Chinese February HSBC Flash Mfg. PMI which rose to a 4-month high (50.1 vs. Exp. 49.5 (Prev. 49.7), although export orders fell by the most since Jun’13. JGBs gained 29 ticks, lifted by spill-over buying in USTs yesterday’s and the BoJ buying a total of JPY 1.18trl worth of government debt from the market.
Despite the upside for Gilts, GBP actually outperforms in the FX market this morning as policy divergence takes precedence given the dovish outcome of Yellen’s speech compared to more hawkish commentary from the BoE of late. More specifically, BoE’s Forbes yesterday said that gradual increases in interest rates should support the economy in the UK adding that low inflation present at the moment will fade quickly while BoE’s Weale said that the BoE may have to lift rates before the time frame which markets are currently expecting. Elsewhere, given the move lower in US yields, USD has continued to trail its major counterparts, much to the benefit of EUR with EUR/USD making a technical break above yesterday’s highs while EUR/GBP manages to remain resilient to the broad-based GBP strength. Finally, CAD has managed to hold onto its gains against the Greenback in the wake of those less dovish than expected comments from BoC’s Poloz, which has resulted in markets scaling back their expectations for action by the central bank next week.
In the commodity complex, both spot gold and silver remain in the green with the weaker USD aiding prices. Elsewhere, Copper saw a mild decline overnight, while iron ore prices were also weaker as the largest buyer China saw a subdued return to the market following the week-long Lunar New Year holiday. Despite the reprieve for precious metals markets, the energy complex has failed to capitalise from the move following last night’s API inventory report showed a smaller than previous build in stockpiles (W/W +8900k vs. Prev. +14300k) but a build nonetheless.
