US Fed comments give local market a head start

US Fed comments give local market a head start

By Miguel Audencial (Sales Trader, CMC Markets)

The Australian equities market is expected to have a head start later this morning following assurances from the US Fed that the current expansionary monetary policy will continue.

The energy sector is likely to outperform the market later today because of higher crude oil prices overnight.

At least momentary, the US Fed Chairman was able to grab the attention away from the drama in Cyprus during the FOMC statement last night. The announcement that the $85 billion monthly bond buying program will continue until late this year or early next year provided some confidence to investors to take additional risks. It also provided the boost needed to stop the three day losing streak on the equities market, which was initiated by the financial crisis in Cyprus.

The US employment rate has improved since the initiation of the bond buying program where the unemployment rate was reported at 7.7 per cent last February, down from 8.1 per cent on September last year. However, this rate remains elevated according to the US Fed Chairman and comments that the target interest rate would remain near zero as long as the employment rate is above 6.5 per cent and inflation is projected to be under 2.5 per cent.

Crude oil prices traded higher overnight as inventories unexpectedly decreased by 1.3 million barrels, which is significantly different from a projection of an increase of 1.8 million barrels. The lower US dollar also contributed to the increased demand for the commodity. The third factor for the higher crude oil price and higher demand prospects is the assurance from the US Fed that the bond buying program will continue.

Traders will watch closely China’s release of the HSBC Flash Manufacturing PMI later this afternoon. The French and German Flash Manufacturing PMIs figures are also due later tonight. There is a lot of economic data that investors need to digest from the US tonight, which includes the weekly unemployment claims, Flash Manufacturing PMIs, Existing Home Sales and Philly Fed Manufacturing Index. There is potential for a volatile session tonight if these figures are far from analyst’s expectations and if any unexpected developments from Europe are reported to the market.

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