The US Federal Reserve has once again come to the market rescue at its overnight meeting. A conciliatory statement, an acknowledgement of global market reality and a slower implied course of rate hikes sparked a surge in risk appetite.
Shares climbed as the USD fell. Commodity prices leapt and bonds slumped, with the US ten year bond back above a 1.90% yield. The volatility index fell to its lowest level for 2016, suggesting the fear that has stalked markets this year is receding following the Fed’s announcement.
Strong economies are a much better reason to buy stocks than central bank support, but investors in distress are not choosy. The impression of a safe, strong and careful set of hands on the levers of US monetary policy re-assured markets that the divergence on the pace of monetary tightening between the Fed and the market is reconcilable. The Fed offered to meet the market in the middle, with its dot plot of expectations adjusted to reflect only two rate rises this year, down from four previously.
Overnight action suggests strong support at the open for Australian shares. Both gold and oil rallied, courtesy of a lower USD. Combined with a 1% rally in the S&P500 from negative to positive after the announcement, there is a possibility that the Australia 200 index will outstrip futures market expectations of a 34 point rally.
Traders will look for two complicating factors in today’s trade. The surge in risk appetites has pushed the Australian dollar back towards nine month highs, potentially cruelling international appetite for Australian shares. Additionally, the quarterly futures and options expiry today will likely see huge volumes of shares changing hands at this morning’s open. The increased liquidity is an opportunity for larger fund investors seeking to re-shape portfolios, but may also distract the biggest players reaction to the overnight news.