Interest rates likely to remain low long-term

Federal Reserve chair Janet Yellen's speech on Friday could prove a pivotal moment for markets, as markets hunt for the latest clues about the direction of US and global interest rates.

Despite a weak lead from overseas markets, Australian shares rose yesterday, picking up on the positive sentiment across the region and helped by renewed weakness in AUD/USD. The S&P/ASX 200 finished the day up 56 points to 5721, with all sectors showing strength. Iron ore plays in particular responded positively to a bounce in the commodity price and to a weaker Australian dollar.

Meanwhile, last week saw the lowest volume week in the S&P 500 in 2015 since New Year (which is historically the slowest week of the year), yet it moved higher and its range was the tightest range of the year.

Much of the attention was on Yellen's speech on Friday, which had the effect of moving market focus beyond the first rate hike to a recognition that interest rates are likely to remain relatively low for a long time to come.

Ric Spooner, chief market analyst with CMC Markets says Yellen's speech was an indication to investors that there remains considerable risk in exiting risk assets on the basis that rising rates will force a devaluation.

"Yellen's expectation that 'it will be several years before the Fed Funds rate would be back to its 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 per cent," he says.

Recognition that any increase in long-term rates may be very gradual was reflected in the world market reaction to Yellen's statement. "Bond yields held steady, while movement in the US dollar and equity markets were muted," Spooner says.

'FED-WATCH' MODE

Evan Lucas, market strategist with IG Markets says what is clear from Yellen's speech is that markets have re-entered "Fed-watch" mode. "Yellen's speech clearly had enough in it for everyone," he says. "The fact the Fed continues to delay rate rises will only add to the current situation in equities."

He adds, by design, bonds are staying low. "The USD will be an asset currency and the EUR, JPY and the CHF are going to be funding sources and equities will rejoice," he says.

Global economic news is light this week. There is a decision out of the Bank of Canada, along with the Bank of Japan minutes. The situation with Greece's debt looks as though it could be moving closer to a crunch point and is likely to figure in traders' risk calculations this week.

"With US GDP due out Friday, we anticipate watchers will bid the US dollar into this news," Mark Lennox, senior private client adviser at HC Securities says. "Technically, the USD/JPY cross has formed a perfect ascending triangle and is now at risk of breaking out to levels not seen since 2001."

'COMPLACENCY IS BACK'

Data on the domestic front is also very light this week and commentators are anticipating the ASX 200 to be range-bound between 5626 and 5750.

"We anticipate little fanfare seeing out the end of May and transitioning into the end of the financial year," says Lennox. "This could potentially lead to tax-loss selling in the larger end of the market."

Meanwhile, Lucas says the options market is telling the market one thing: that complacency is back in a big way.

"Put/call spreads are clearly illustrating this," he says. "Volatility is dissipating and risk buying is grinding higher."

Meanwhile, gold has eased back in the past week towards the key $US1200 level where it is enjoying some support. Stuart McPhee, senior technical analyst at OANDA Australia and Asia Pacific says even if it broke through this level, "the $US1180 level is sitting waiting patiently to step in and help if needed".

via AFR