Forget The Fed, Stocks And Bonds Rally As US Dollar Weakens

 | Aug 30, 2016 11:44

h2 QUICK RECAP

It’s not a surprise that price action in the US was a little different to the feeling that permeated Asia yesterday. The Fed has a credibility problem and until it acts that’s not going to change in a hurry. Equally though research from the San Francisco Fed suggested a shallower path of rates going forward.

So while traders recalibrated their recalibration of the Fed bonds rallied a little, currencies were mostly unmoved, gold rallied a little, stocks went whoopee and oil fell again.

OPEC and the Fed have the same credibility problem.

h2 WHAT YOU NEED TO KNOW/h2

Here’s what I picked up

International

  • Stocks in the US recovered easily as traders decided that they aren’t afraid of the big bad Fed after all. Personal consumption data was okay so the narrative I’m reading in many places is “she’ll be right mate” the economy is strong enough to deal with a Fed hike. I agree.
  • So with half an hour left in trade today the S&P 500 is up 0.58% at 2181, the Dow Jones Industrial Average is up a similar amount at 18500, and the Nasdaq 100 is up 0.37% to 5238.
  • The raft of naysayers on a Fed hike in September began early yesterday. I saw a piece from PIMCO saying as much, David Scutt at Business Insider covered a HSBC note saying the Fed won’t hike until 2017, and then early this morning BlackRock’s CIO Rick Rieder said Fed chair Janet Yellen’s comments suggest just one hike this year – he must know more than Stanley Fischer it seems :S. Dow Jones reported that Investors' focus on a quarter-point rate increase is "excessive," as the world is being driven by "a demographic evolution that takes a very meaningful haircut off of normal run-rate levels of growth," and by "historic technological and cultural revolutions that are changing the fabric of today's economy," Rieder says.
  • But is that really a take on Yellen or Rieder’s own view? Clearly it’s the latter. He’s doing what traders do every day and fitting the speech to his bias. The behavioural finance and economics types would call this confirmation bias and I think pretty much everyone who doesn’t want to listen to the constant stream of comments from the Fed in recent week’s saying September is live and rates need to rise is falling into either this trap. Why would the Fed actively try to mislead markets? It wouldn’t. SO the unanimity of comment suggests this is actually what it is thinking individually and what it will end up talking about collectively when the FOMC comes together.
  • So for mine the market continues to underweight the chances of a hike oe, perhaps more likely, an aggressive dot plot and signal on rate rises after the meeting. The problem of course, is of the Fed’s own making. It could have tightened earlier this year. It would have been uncomfortable given all the turmoil at the time. But just like markets recovered from the China devaluation funk they would have recovered from a Fed hike. So it only has itself to blame for the lack of credibility it has with traders at the moment. Like OPEC the Fed is the boy who cried wolf just a few too many times.
  • The problem with that is it increases the chance of a shock – at some point the Fed has put its marker down.
  • That's particularly the case because just as the consumption of GDP showed Friday that sector of the economy is doing quite well. Last night’s release of personal consumption data was on expectations with spending up 0.3% and income up 0.4%. PCE inflation was flat however.
  • In the end bonds rallied a little bit, the 2’s are down 4 points to 0.81% in the US.
Get The App
Join the millions of people who stay on top of global financial markets with Investing.com.
Download Now

  • Non-farms. Friday. HUGE!

Australia

  • Talk about throwing the baby out with the bath water. Yesterday was an awful day on the ASX although the 0.84%, 46 point, loss was better than the low point of the day.
  • The price action is instructive about maybe how local investors are feeling. I wrote an article yesterday at Business Insider covering the Deutsche Bank (DE:DBKGn) note on earnings season. What was interesting was just how expensive local PE’s are relative to the globe. That make them a little rich and perhaps vulnerable. Maybe that why the baby got tossed out.
  • Anyway the SPI futures are suggesting a 12 point rebound at the open. But the local market will need to get back to 5500 on the physical to defeat what could again be a creeping lack of confidence in local shares. Valuation is important and price action tells us how folks are feeling about valuations. My sense is we’ll eventually retest 5395/5405.