Futures are largely unchanged ahead of today’s, if not the year’s, key event: the FOMC meeting in which Janet Yellen will announce the end of QE3, and with that the market will finally realize that the training wheels from the past 6 years are off, if only until the next market tantrum, or European/Chinese gray swan, pushes the Fed right back in.
As Deutsche Bank observes, the Fed has been wanting to hike rates on a rolling 6-12 month horizon from each recent meeting but never imminently which always makes the actual decision subject to events some time ahead. They have seen a shock in the last few weeks and a downgrade to global growth prospects so will for now likely err on the side of being more dovish than in the last couple of meetings. They probably won’t want to notably reverse the recent market repricing of the Fed Funds contract for now even if they disagree with it. However any future improvements in the global picture will likely lead them to step-up the rate rising rhetoric again and for us this will again lead to issues for financial markets addicted to liquidity. And so the loop will go on for some time yet and will likely trap the Fed into being more dovish than they would ideally want to be in 2015.
But for now, expect a creeping hawkishness to finally be realized by a broken market that has levitated on nothing but implicit and explicit Fed support for the past 6 years. In the meantime, for those curious how to trade today’s FOMC, DB’s Alan Ruskin notes that over the last two years the S&P 500 has on average been 0.35% down on the day of the statement when there is no press conference. When there is one the index is up 0.87%, perhaps reflecting the dovish nature of Bernanke and Yellen relative to the committee. There is also more volatility across different asset classes on press conference days. Alan speculates that this is perhaps due to the market’s interpretation of the dots that appear at press conference meetings.
So will yesterday’s epic short squeeze be undone? Tune in in just over 7 hours to find out.
In the meantime, despite yesterday’s amazing Facebook flameout which rivaled the Antares rocket explosion, in which a conference call announcement about the company’s rapidly slowing growth and soaring expenses sent the company, held by nearly 130 hedge funds, plunging by over 10%, yet another rollercoaster night of Yen-carry levitation has assured that all initial losses in the Emini are made up futures are flat to start the day.
Once again, price action for European equities has centred around the slew of large cap companies reporting throughout the session, with European indices trading in the green with the exception of the IBEX and FTSE MIB. More specifically, Spanish heavyweight BBVA (-1.9%) is leading the Spanish banking sector lower, with Saipem and STMicroelectronics placing further weight on peripheral stocks following their respective earnings reports. In terms of other notable stocks news Sanofi (-4.0%) have announced they have ousted their CEO, while Total (+1.3%) have provided the CAC with some reprieve after their positive pre-market update. Despite the modest upside for stocks, fixed income markets trade in a relatively unchanged with today’s covered Bund auction failing to provide the German benchmark with any sustained price action.
Turning to Asia markets are generally stronger across the board following the positive lead from the US. Bourses in Japan, Hong Kong, China and Korea +1.6%, 1.4%, +1.2% and +1.7% respectively as we type. Focusing on Japan, the September industrial production print surprised to the upside (2.7% mom v 2.2% exp) but all eyes will be on the conclusion of the Bank of Japan policy meeting on Friday for whether a refresh of policy is attempted or hinted at. Asian credit markets are also on a firmer footing overnight with IG spreads around 1-2bp tighter across benchmark names while new issues are also being well absorbed.
