The Fed kept rates the same as expected. The markets seem to be taking the language, specifically the comments on monitoring world developments, in a dovish manner. Yields are down as well as the Dollar index immediately after the news broke, gold moved higher as well. Equities are diving lower which seems to be a bit off the assumed 'lower for longer' trades, this could be off the fact that the Fed seems to think the global issues could derail the real economy, and are worth watching.
That being said the Fed did not rule out a March rate hike and that will depends entirely on the data. So use the volatility over the next 24 hours to better position a longer, data dependent, trend
Tomorrow the Fed is having its interest rate decision meeting. No changes are expected to occur but it will be an important meeting none the less. What many in the markets will look for at the meeting (along with Fed presidents speaking after the meeting) is too see if the recent market movements have seeped into the decision making of the FOMC. The markets are behaving like a hard landing in China and a slowdown in growth are all but certain. But if we look closer to what the Fed is seeing, we may see them come out with more upbeat guidance than expected.
The jobs numbers are still at the full employment mark and even small upticks in this number will not materially concern the Fed in the near term. While the headline inflation number is low, core inflation remain robust and declining oil prices do not seem to be seeping into the core number. If oil prices do start to rise then this will just start to add more fuel to the headline inflation number and eventually core.
The Fed will not want to appear too dovish on the market expectations as this could cause shocks later in the year if inflation doesn't start to represent the gloom the markets are pricing in. On another note if the real economy does start to waver and core inflation declines, the Fed will be forced to act and the whole cycle of easing measures will come back into focus.
Much will (or at least should) depend on the data and less on the market when it comes to future Fed policy.
Capital controls are being put in place in Countries like Azerbaijan don't cause too much concern to the overall markets but this could be a case study for other countries dealing with the same issues; with market moving influence. Saudi Arabia has recently advised bank not to engage in forward contracts on the riyal. Russia has been briefed by one of its top economic advisors to provide some form of support to the rouble, in the form of controls of purchases.
The Saudi's determination to keep the dollar peg despite the strain on the country is being challenged by some investors. This is causing the government to try to move towards supporting the peg without looking desperate. A true crisis of confidence can be devastating at this moment and the Saudis are truly being challenged. With a War in Yemen being the main focus the US and France are looking to get more involvement and support from countries like Saudi Arabia in the fight against Assad and ISIS in the north. This will cause a war on two fronts and strain the current military without more spending on equipment and troops. Failure for them to commit will show the strain and weaken confidence that they can fight the war against terrorism in the south and the war against losing market share in the west.
Russia has seen its currency move below the level seen in a brief drop at the end of 2014. This is on the news by the Russian central bank chief saying there will be no intervention to support the rouble and the bank will only intervene if there was a threat to financial stability. Oil prices and sanctions will be dictating the threat to financial stability and the Russian government will have to react. At this point the selloff in Russian equities and the currency have priced in the worst case scenario and any stimulus would be a lifting sign. With oil low and regional tensions high, the worst case scenario could still surprise.
The IMF has lowered the global growth outlook and the IEA says oil could see continued weakness from the introduction of Iran oil to the markets. None of this matter when there is a positive spin on Chinese GDP. GDP numbers in the country grew so slow that many analysts took it as a sign that stimulus will come to the aid. This has a reversal in everything that has been beaten up over the slowing China story. Oil and copper have spiked and indices around the globe are higher. This is all good news for a day or two as markets have plenty of short sellers that are looking to get out, however with the markets looking to stick the rally on policy changes, prepare for more volatility.
BOE governor Carney has just dampened hopes of an interest rate hike sooner rather than later, citing poor wage growth as the culprit. A weaker pound is expected to slow the downward pressures on the currency and this could keep the inflation rate from going lower. Wage growth as the focus of the BOE decisions has taken off some of the gains the Pound has seen to the Dollar this AM. With other factors looking to stabilize inflation in the area, could this be a good time to start looking at the Pound longer term against currencies such as the Yen and Euro? With more events such as the vote to remain in the EU. Policy uncertainty will surely discount the true value of the Pound for some time.
A possible sign of relief, the Chinese markets went down Monday morning without bringing the whole financial system with it (though commodities are still following Equities lead). The rise in the Yuan was most likely the culprit, showing less pressures by the government to devalue the currency. I would like to think that the Chinese authorities will take note of the fact that most of the markets are not hinged to the Chinese equity markets because they do not represent the future forecasting of the overall economy like other countries. Being mainly policy driven Chinese shares should not be having any effects on the global economy.
What is important to look at is the exchange rate. With the Yuan moving lower with the markets over the past few days the link between the two seemed present. Let’s hope the Chinese authorities realize what the markets do, that the stock market isn’t important enough to warrant changes to policy that affects the real economy. Then hope markets don’t forget.
In the spirit of free markets the Chinese authorities have removed the circuit breakers from the markets on the 8th; and then intervened to boost the declining market. These changes in policy and the addition and removal of measure only to try others will not help build the foundations of a market driven economy. Transparency in the current system and a lack of uncertainty in future regulation would allow for longer term investors to weather the storm without worry about being lock into stocks or see restrictions on selling. Freely shorting stocks would also provide less volatility in the nadir and peaks of the markets where many would have been shorting A-Shares near the top of the market and would be buying to close their shares in selloffs like the ones we are seeing now. This absences of short sellers from the top of the markets will not be closing out positions to provoke the upswings in the markets we see elsewhere when sentiment turns. Much is this is now left to the government to do through intervention and devaluation which causes more uncertainty.
This cycle will not end without a few stumbles in the market and some shocks to the global markets, but who those bad times are handled by the regulators and authorities is what will matter in the recovery. At a certain point the sellers of policy driven greed will be replaced by market driven value investors and the market will have a stickier investor base. With the authorities always stemming the losses of the current lot of stock owners the prevailing bias is continuing to be reinforced.
Despite tensions between Saudi Arabia and Iran, North Korea claiming to have detonated a Hydrogen bomb, and PMI numbers coming out across the globe; the Fed minutes will still shape the outlook of traders in the US. The markets have been trying to build a story to work on over the frequency of the rate increases and what the projected rates will be in a years time. Having a much lower expectation of how much the Fed will raise rates is a product of the fears that are in the market as well as muted inflation expectations due to lower oil and turmoil in China.
The dangers of this discovery process is putting too much emphasis on too little information up front. Especially with the markets having some shell shock at the start of the year, any signs of internal debate among the voting members, or solid resolve will be taken through a negative lens. The past few days have made it tough to look at the longer term trends that are going to determine if inflation will keep up and rates will need to be increased. Longer term data is going to be the ultimate factor that determines whether the Fed gives in and lowers their expectations while the market has a hard time not putting their prevailing bias into the equation.
Inflation rates, Source: investing.com
After the selloff yesterday regulators in China decided that more intervention was needed to keep the market at recent levels. Injecting about $20bln into money markets and buying stocks in the market, China has again added to the uncertainty of where true valuation lies in their stock market. The resumption of the ban on selling looks like it will remain past the Jan 8th deadline as well.
This intervention just adds to uncertainty in exchange for short term relief in the markets, and almost guarantees the level of skepticism and market volatility out of China as seen in August. In the coming days questions about currency valuations and freezing of stock trading will some back into question. Longer term this will just make it harder to get outside investment into the market. By intervening the country is again linking the real economy with the stock market which is a dangerous relationship since the markets are driven by perceptions of value.
It will be interesting to watch how the difficult process of unwinding these measures will take place in the coming months and will no doubt be a global market moving event for some time.
Re-allocation, January effect, call it what you want. Markets in Asia and Europe are decidedly lower the first day of trading. This has some meaning as books for 2016 are now open, but it really ends there. In this volatility there are some positions that look enticing but a lot can happen in the other 361 days.
One thing to note is the resilience of oil. Tensions between Iran and Saudi Arabia over the execution of a cleric could alter OPEC meetings as a sanction-less Iran becomes less cooperative. in the near term it looks like all these tensions have just brought a nice bounce to gold which is representative of a broader theme for today: Do the moves on the first day of trading in the new month, new quarter, new year mean more than others, or less.