FOMC Member Dudley Hopeful

Daily Analysis - 27/08/2015

New York Federal Reserve President Rejects Further Quantitative Easing

During the question and answer session conducted yesterday with FOMC voting member Bill Dudley, the New York Fed President commented on a number of matters including the timeline for interest rate hikes and how weak inflation is expected to be temporary.

Dudley Hopes To Raise Rates

Despite the number of downside risks New York Fed President Dudley mentioned during the Q&A session following his remarks, he remains hopeful that the Federal Reserve will raise interest rates in 2015, effectively diminishing the probability of a September hike. According to Dudley “the case for September rate hike [is] less compelling.” Citing international developments in particular, Dudley was concerned about the potential for these events to tighten liquidity conditions further, a problem that might be exacerbated by the FOMC choosing to hike rates. When it came to inflation, he was fairly upbeat and optimistic, expected the impact from lower oil prices and the higher US dollar to be temporary dislocations instead of long-term trends. The one surprising comment was the dismissal of increased asset purchases, stating “we are a long way from additional quantitative easing.” The dollar managed to book further gains on the comments, pushing gold prices back below the key $1132 level.

Crude Oil Inventories Slip

Following the dramatic API drawdown recorded during the previous session, the Department of Energy’s crude oil inventory numbers showed that stockpiles fell by 5.452 million barrels in the latest reporting period. Moreover, American crude oil output fell to the lowest level in three months despite a smaller contraction in production versus what has been witnessed in the last 5 weeks. Crude oil prices failed to rebound on the announcement, but managed to climb higher overnight following the relief rally exhibited in other risk assets. Adding to concerns about prices is recent comments from Iran that might spark another price war amongst producers. Iranian Oil Minister Bijan Zanganeh supports calling an emergency OPEC meeting to discuss the rout in prices and what measures could be used to stabilize the market. However, if a meeting is scuttled, he said Iran is willing to fight to win back market share, stating “we will be raising our oil production at any cost.”

Relief Rally Underway

As markets begin to digest China’s latest policy shifts and US policymakers discuss the viability of interest rates rising in the short-term, a rebound in risk assets is underway as evidenced by the rally in equity benchmarks that began with the extraordinary gains in US indices. The Nasdaq Composite surged 4.24% during the cash equity session, leading peers to the upside. The rally comes amid one of the worst two week losing streaks in years as value investors came off the sidelines in a buying frenzy. Volatility continues to be high as evidenced by the substantial intraday swings evident across asset classes as the VIX Volatility Index remains elevated despite a near -16% slide yesterday. Chinese stocks are trading back in positive territory, bouncing over 4% in some cases with the Shanghai Composite up just over 3%. European futures are pointing to a higher open, carrying over the strength from the Asian session.

Dow Jones Ascending Triangle Technical Pattern

Following one of the worst losing streaks in years and despite taking out a major long-term trend line, the Dow Jones is in the process of rebounding from recent losses. The relief underway in risk assets has mostly been felt in equity markets which have erased much of the slump that transpired earlier in the week. Dow Jones futures have been consolidating since Monday between a near-term uptrend and resistance sitting firmly at 16340. The formation has seen an ascending triangle pattern emerge in the Dow Jones exhibiting a strongly bullish bias. Ideal positions taken below resistance target an upside breakout above the key resistance level with any move below the trendline considered a breakdown in the triangle pattern and potential reversal back to the downside.