Yellen v Bank Bears
Janet Yellen’s speech last night changed market thinking on the Fed’s monetary policy stance. This was reflected in a sharp drop in US bond yields, a weaker $US and a bounce in the US stock market. The question for local traders is whether this will be enough to give pause to the strong selling momentum in Australian bank stocks.
Even if there is a bounce in bank stocks, the strength of selling over the past two days is likely to leave markets nervous about this sector for a while yet. By most metrics, Australian banks asset quality is strong. However, with the prospects of limited revenue growth, any modest increase in debt provisioning like those revealed by ANZ and Westpac on Friday has creates nervousness about the sustainability of current dividend payments.
The net effect of Fed statements over recent weeks has been to close the gap between market expectations and the Fed outlook. It’s clear that the Fed is truly data dependent and so like, everybody else, does not know whether and when it will be raising rates again this year. However, an April late hike now looks very unlikely in light of last night’s comments by Janet Yellen. Unless inflation; wage growth or inflation expectations grow faster than currently expected, it also seems very unlikely that the Fed will lift rates more than twice this year.
Clarity around a more dovish Fed outlook is a positive for the gold market. The degree of market change in outlook on the $US is likely to attract investor interest in local gold stocks. However, it’s significant that the weaker $US could not push industrial commodities like oil and copper higher. Traders are reluctant to push industrial commodities any higher without a corresponding improvement in the underlying demand/supply fundamentals.