Tapering announcement subdues equity market

Share Markets:

The optimism from the from the FOMC meeting extended to European stocks overnight with the Euro Stoxx rising 1.9%.

US equity markets were much more subdued given the Fed decision had already been digested by investors in the previous session.

Mediocre economic data and the festive season drawing close were also behind the lacklustre trading in US stocks.

The Dow closed up 0.1%, the S&P500 was down 0.1% and the Nasdaq 0.3%.

Bonds:

US treasuries fell (yields rose) as bond markets continued to digest the Federal Reserve decision.

The rise in yields would suggest that markets are beginning to price in a steady path of reducing asset purchases, and comes despite the Fed's warning that tapering was not predetermined and highly data dependent.

The yields on 10-year treasury notes lifted 3 basis points to 2.93%, still below the highs reached in September.

Yields on 2-year notes also rose, but were well below their September highs and suggests that markets are paying some attention to the Fed's commitment to keeping short-term interest rates lower for longer.

Foreign Exchange:

Currency markets were also mulling over the Fed announcement.

The US dollar index continued to edge higher - the greenback was near a five-year high against the Japanese yen. Other currencies hit multi-year lows against the US dollar.

The Australian dollar hit a three-and-a-half-year low and consolidated around 88.4 to 88.6 US cents overnight.

Commodities:

Gold and copper prices were weighed down by the Fed's decision to slow the pace of stimulus. Gold prices hit a six-month low. However, the broad CRB commodity price index rose, driven higher by stronger oil prices and higher grain prices.

Oil prices gained support from American Petroleum Institute data showing strong demand for distillate exports and petroleum products.

Australia: 

No domestic data to report.

New Zealand: 

The New Zealand economy grew by a stronger-than-expected 1.4% in the September quarter. It followed revised growth of 0.3% in the June quarter (previously reported as 0.2%).

The annual rate of growth stepped up from 2.3% to 3.5% in the year to the September quarter.  Growth was driven by agriculture, as dairy production rebounded after drought.

The upward momentum in the New Zealand economy over 2013 increases the likelihood that the RBNZ will lift the official cash rate early next year. 

In another sign of improving growth prospects, New Zealand posted a NZ$183mn surplus in November, the first monthly surplus in five months.

The turnaround was largely due to stronger dairy exports.  The annual deficit has narrowed to NZ$248mn, the best result in nearly two years.

United Kingdom:

UK retail sales rose 0.3% in November, in line with market consensus. Core retail sales excluding autos were 0.4% higher in the month although there was a downward revision to October's fall to -0.7% from -0.6%.

The headline annual rate rose to 2.0% from 1.8%, while annual growth in core sales was steady at 2.3%.

United States:

US initial jobless claims rose to 379k in the week ending 14 December.

The Labour Department noted that despite there being no specific special factors affecting data this week,

December data are often unreliable given the difficulties of seasonally adjusting the readings. The four-week moving average rose to 343.5k from 330.25k.

The US Philadelphia Fed index rose to 7.0 in December from 6.5 previously. This was slightly softer than consensus (10) but the overall report was still positive with improvement in most sub-indices.

New orders, in particular, were up to 15.4 from 11.8 while shipments and employment also both posted gains.
US existing home sales fell 4.3% in November which was the third consecutive monthly decline.

The annualised rate slowed to 4.9mn in November from 5.12mn in October.

Soft sales activity is a bit at odds with other indicators that are pointing to stronger momentum in the housing market such as prices and construction.

The discrepancy could be explained by low inventory on sale.


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