Singapore Markets Morning Briefing - what you need to know for Tues March 27, 2012

Equities, commodities, currencies, and treasuries all were impacted by FOMC Chair Ben Bernanke’s comments.

OCBC Investment Research said:

The rally on Wall Street overnight and the strong Nikkei start (+1.4% now) are likely to inspire the local bourse to a strong opening this morning.

As a recap, the STI slipped further south yesterday despite a positive start; after climbing as much as 0.2% at one point, the index fell into the red and closed 0.5% lower.

But with today's tone likely to improve significantly, we could see the index rebounding at its 3-month uptrend support before recovering further to retest the 3030 (recent peaks) key obstacle.

Above that, the subsequent resistance lies at 3075 (support-turned-resistance). On the downside, we still see the immediate base at the 2960 support (recent minor trough), followed by the subsequent base at the 2900 key resistance-turned-support.

GFT meanwhile reported (for 26 March 2012 trading):

This morning’s comments from Fed Chairman Ben Bernanke had a major impact on currencies, equities, commodities and Treasuries. Speaking on the topic of unemployment, Bernanke made it clear that low interest rates and a large asset purchase program is needed to keep the recovery going.

On the surface the key takeaway from Bernanke’s speech was that contrary to popular belief, the Fed is still thinking about increasing stimulus. They haven’t made any decisions yet but they indicated that in order for recovery to turn into growth monetary policy needs to remain accommodative.

Out goes the idea of a 2013 rate hike – which is an important takeaway from Bernanke’s speech but the main takeaway is that the central bank is not happy with the recent movement in Treasuries.

To the frustration of the Federal Reserve, bond yields have been slowly creeping higher with the 10-year bond yield rising to a 5 month high of 2.39 percent last week. Considering that the yield was at 2 percent as recently as March 7th, the huge increase was enough for the Fed Chairman to adjust his tone.

When the Fed last met on March 13th, Bernanke acknowledged the improvements in the U.S. economy, leading investors to believe that additional stimulus was no longer necessary. The day before the FOMC announcement, the U.S. 10 year yield settled at 2.04 percent but a week later it rose 17 percent.

All of the Federal Reserve’s efforts have been aimed at keeping yields low so you can imagine why the rise in yields motivated Bernanke to reset interest rate expectations. Based on the sell-off in the U.S. dollar, rise in stocks and commodities, the message was received loud and clear by most investors.

Unfortunately bond traders weren’t in the loop as the 10 year bond yield rose on the day. If we are right about Bernanke’s motivation, then we can expect more dovish comments from Federal Reserve officials until bond yields decline to more comfortable levels.