Yellen speech keeps equity markets on track

The stock market looks set for a relatively flat day today as traders stay in neutral mode ahead of tonight’s US holiday. World equity markets also appear to have taken Janet Yellen’s confirmation that the Fed is likely to hike rates this year in their stride.

Janet Yellen’s speech last week has had the desired effect of moving market focus beyond the first rate hike to a recognition that the interests rates are likely to remain relatively low for a long time yet. Her speech was an indication to investors that there remains considerable risk in exiting risk assets on the basis that rising rates will force devaluation. Yellen’s expectation is that “that it will be several years before the Fed Funds rate would be back to it’s normal, longer-run level” is a reminder that there could be a long time between the first rate hike and any move in US bond yields significantly above 3%.

Recognition that any increase in long term rates may be very gradual was reflected in world market reaction to Janet Yellen’s statement. Bond yields held steady, while movement in the $US and equity markets were muted. This was a good result for investors, given that news of an improving CPI was a pointer to the fact that inflation is very close to being removed as a constraint on the Fed’s move to begin lifting rates and the first rate hike is likely to be only a matter of months away.

The situation with Greece’s debt looks as though it could be moving close to crunch point and is likely to figure in traders’ risk calculations this week.

Recent price action has now set up key support and resistance levels for the ASX 200 index for the short term. The 200 day moving average and last week’s low around 5570 now form support. A break below this level would be a bearish indicator. On the other hand the mid May high and March low around 5750 now look like significant resistance. A move through this level would provide comfort that the stock market is going to continue to drift in a trading range rather than head lower after May. 

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