Blame Current Market Weakness On The Last FOMC Decision?
Andy Farida | Jan 25, 2016 07:29
FOMC Rate Hike
Recent US dollar strength, despite many runs of poor economic data – certainly indicate that the Federal Reserve may have to further delay the rate hike. 2015 FOMC press conference has a track record of “mood swings” as Yellen et al produce series event of volatility and uncertainty (going from a dove to a hawk then vice versa). What can we really expect to happen in the next FOMC press conference? We think that it will be very much dictated again by the market.
Top market analysts and economists remain split. Some in the camp are keeping with the projection that 4 rate hike will happen this year regardless of the economic situation. Their base argument is that US economy is fundamentally strong and will remain stronger going into the year – that China will recover. Skeptics on the other side played this down. Arguably, they are more flexible and deduced their prediction based on current economic climate that a maximum of 2 rate hike. On the extreme end, we have Ray Dalio of Bridgewater Associates who suggested that we must not discount out a QE 4 scenario to happen this year. Dalio added that “…a move to Quantitative Easing would bolster psychology”
The Tantrum
2016 is barely 4 weeks old but the global market has certainly taken a wild ride of roller coaster. There were real fear as trading volume start to return across the trading board. Big sums of wealth are lost in the equity market (see below). Top banks are advising clients to liquidate their positions away from stocks and moved to bonds. Safe Haven assets have really benefited – examples of this can be seen below.
Biggest mover post December FOMC rate hike (to name a few):
- USD/JPY – BOJ steadfast that no easing is required since the last press conference
- USD/CAD – recent Oil rout has weakened the CAD
- GBP/USD – poor economic data and BOE has no intention of an imminent rate hike
- XAU/USD – has gold priced in 4 rate hike in 2016?
- OIL – extreme capitulation and heavily shorted by Hedge Funds
- CHINA – SHCOMP fall out of bed – high of 3300 as of 4th Jan and low of 2880 20th Jan
Chart courtesy of Zerohedge.com
Given such a big shift in global equity, outflow of money has to go somewhere and we have seen that going into safe haven assets and in particular a strong USD, Yen and Bonds.
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Food For Thought
Tensions from Chinese yuan devaluation and recent Geo-Political. 2016 will prove to a tricky year as traders will have to include much more volatility within their trading formula. We are not expecting an easy ride but a rather turbulent one given the recent changes that are happening around the world. A few items to mull over:
- Relationship between China and Taiwan after recent poll win by DPP Tsai Ing-Wen
- Sovereign debt to mount across Oil developing economies?
- US presidential election could add more spice – Trump effect
- War in Middle East continues –
- Growing terror threat from ISIS
- Is 2016 an inevitable year that a market correction is coming? The extreme spectrum is a Global Recession
- Will we see the FED doing 4 rate hike? Can BOE move to a late December rate hike?
- More QE across Japan and China?
USD/YEN
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USD/CAD
Monthly
GBP/USD
Weekly
Oil
Daily
Shanghai Composite
Monthly
Expect More Of The Same?
In the short term, the answer is no. Generally, the market may have hit rock bottom so a period of consolidation and heavy petting by central banks will alleviate some of the fear that terrorized the world in the last 3 weeks. We conclude by saying that there has been a shift in the technical and fundamental picture. Risk reward has skewed in favor of a reversal type rally in the equity market while commodities will also see short covering rally. FOMC meeting will aim to offer soothing words to the market – thus a dovish remark may well be the case.
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