Markets positive on Yellen's hawkish tone

The Day So Far

Markets responding positively this morning to hawkish comments from Yellen, who tried to backtrack on her post-FOMC speech which so spooked the markets over the past week. Also, S&P futures hit 1900, a solid level for shorts to take some profits and bargain hunters to step in and snap up some hard-hit stocks. Whilst it seems odd to market-watchers over the past five years that equities would be cheered by hawkish comments from a Fed Chair, but it important for the credibility of monetary policy that the Fed sticks to its previously well-choreographed plan to hike this year. The willingness of the Fed to abruptly change course last week dealt a damaging blow to the credibility of the central bankers, and Yellen was at pains last night to assert that low inflation was transitory. She also downplayed the effects of the China slowdown on the US economy and confirmed that most FOMC members, herself included, were committed to raising rates this year. The Dax powered above 9700 as automakers in particular staged a rebound, while S&P futures have climbed 50 points from yesterday’s lows.

On a more worrying note, Japan fell back into deflationary territory for the first time since April 2013 and the launch of ‘Abenomics’ on falling energy price sand slumping consumer demand. This is a savage blow for Prime Minister Abe and his pledge to lift Japan out of the deflationary spiral they have been in for the best part of two decades. The Bank of Japan has tripled its balance sheet in that time to seemingly little effect.

The Afternoon View

Is this a bounce made to last? That is the question on the minds of investors as equities look to end another volatile week on the front foot. Data-wise, we have final look at Q2 US GDP and PCE, but the most important data will come later in the form of the University of Michigan consumer sentiment survey at 15:00 BST. Whilst respecting the strong bounce in equities, we are sticking with the short theme that has served us well over the past week or so. Look for correlated shorts in crude and longs in fixed income going into the weekend. The euro remains the hardest call, but 1.12 handle has been a good point of resistance and a good place for the dollar to resume its uptrend following the hawkish Yellen speech last night.

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