Tuesday September 20: Five things the markets are talking about
Tomorrow’s double-header with the Fed concluding its meeting and the BoJ announcing something has potential to rock markets, especially FX which is still playing catch up with both bonds and equity price moves for this month.
In regards to sovereign yield curves, Fed expectations are controlling the front-end, while the BoJ and global QE expectations are driving the long-end. For investors, the BoJ is potentially the more important market-moving event despite a history of under-delivering on expectations.
Were the BoJ to deliver on backing away from QE to foster a steeper yield curve rather than go deeper into negative rate territory, the bear “steepener” will continue to be supported in fixed income.
Despite the odds for a Fed rate hike occurring being very low; if Ms. Yellen and company happened to surprise the markets it would be a massive wake up call for all asset classes.
Nevertheless, once the market is able to digest the last of the G3 rate policy action, investors’ attention should quickly shift to the U.S presidential race for forex direction.
1. Equities are a soft touch
Markets continue to blow hot and cold over the Fed and BoJ’s intentions, which remain far from clarified. The Fed is widely expected to leave interest rates unchanged, but could signal a move in December. The BoJ seems to be the outlier as expectations are more mixed, with the market split on whether Governor Kuroda will deliver additional stimulus or signal a shift in monetary policy going forward.
Global equities overnight have softened slightly as a reversal in oil prices are weighing on shares of energy companies.
Asian bourses mostly closed with small losses; although Aussie stocks edged up just under +0.2% after the RBA suggested it would keep interest rates on hold, possibly until next year, to support growth.
In Europe, the Stoxx Europe 600 has inched down -0.3% in early trading, led lower by the financial sector. Commodity and mining stocks are providing mixed support to the FTSE 100 despite travel stocks trading notably lower in the index.
U.S futures are set to open in the ‘black.’
Indices: Stoxx50 +0.1% at 2,972, FTSE +0.4% at 6,840, DAX +0.4% at 10,419, CAC-40 +0.1% at 4,399, IBEX-35 -0.5% at 8,676, FTSE MIB -0.9% at 16,255, SMI +0.4% at 8,226, S&P 500 Futures +0.2%]
2. Oil prices reverse yesterday’s gains, gold little changed
Oil rallied on Monday before settling off its highs on market skepticism over Venezuela’s bid to talk up a potential OPEC output freezes, and on indications that U.S. crude stockpiles rose last week.
Despite next week’s OPEC meeting in Algeria (Sept 27) being an ‘informal’ gathering, oil prices are expected to be rather erratic ahead of the conferences driven by rhetoric, wishful thinking and not necessarily fundamentals.
To date, crude’s summer price premium has mostly been on “hearsay.” Both U.S. and Brent crude are down more than -10% from a month ago, but are still up around +65% from their lows in February.
Overnight, Brent crude futures fell -0.4% to +$45.79 per barrel, while WTI crude has slipped -0.6% to +$43.05 ahead of the U.S open.
Spot gold has rallied +0.2% to +$1,315.90 an ounce, on expectations that the Fed will stand pat on rates.
Among other precious metals, spot silver has rallied +0.1% to +$19.16 an ounce, while Platinum has gained +0.4% to +$1,024.85 and Palladium up +0.4% to +$685.50.
3. Yields trade little changed
Despite market talk of a possible surprise Fed hike tomorrow the bond market is not buying it.
Fed funds pricing does not expect the Fed raise rates tomorrow, but many expect the Fed to leave the door ajar for a rate hike in Q4. Current odds show investors and traders have assigned +18% likelihood to a rate increase, the chances for an increase at the Fed’s December meeting stood at +55%.
Note: The yield on U.S 2-year notes, the most sensitive security to Fed policy expectations, is +0.78%, just above the +0.75% upper bound implied by a hike.
The market expects Ms. Yellen to try to balance the ‘hawkish’ possibility of a 2016 rate hike with the more comforting message that rate normalization will be “patient and deliberate.”
U.S 10’s currently yield +1.7% vs. +1.695% Monday.
4. Sterling woes continue on “hard” Brexit landing
Despite most traders attempting to keep their powder dry ahead of the BoJ and Fed rate decisions tomorrow, the market continues to squeeze some of the most vulnerable positions and the pound (£1.3003) is one of those.
Negative rhetoric and innuendo continues to contribute to the pounds slide. Ahead of the U.S open, sterling has dropped to test a new monthly low against the EUR (€0.8608) on worries about the possibility of the U.K. heading towards a “hard” Brexit, which could see the U.K. lose access to the single market. Outright, dealers are eyeing a break of the psychological £1.30 handle with key support levels below seen at £1.2863 and £1.2796.
5. Minutes show RBA is comfortable with policy stance
On reflection, the RBA minutes overnight would suggest that Aussie policy makers appear somewhat relaxed with current monetary policy. This would suggest that the status quo could remain well into next year and allow this year’s two-rate cuts to continue to filter throughout the economy.
In minutes of its Sept. 6 policy meeting indicate that current rate settings are consistent with its growth and inflation objectives, while interest-rate sensitive areas of the economy are getting a lift.
Aussie data indicates that growth is near potential and that their policy stance is consistent with meeting CPI targets over time. There was no indication that the RBA is nervous about a further slowdown, although, it sees little progress in lowering unemployment.
They noted that a lower AUD (A$0.7551) continues to support activity in traded sector, while demand uncertainty is still weighing on non-mining investment. Conditions in the established housing market had generally eased.
Technically, there is no need to tinker with something that seems to be working.
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