Thursday, 9 October 2014

Fed surprises market with no surprises! (and other musings).

October the 27th is traditionally a good time to buy back September/ October sell offs but the market's volte-face in the light of the Fed minutes has me thinking that the fun and games may be over for now. Which is sort of a shame as we have so many ducks in a row as far as a self-feeding cross market sell off is concerned.

Where I think I have been wrong is just how wrong footed the market has been in their expectation of CB interest rate policy despite my belief that they were some way off course. The post minutes price action has to be the key witness in my case against the wasted man-hours invested in predicting yield curves in the previous post here.

Once again it is absolutely staggering how far a market can oscillate from conviction within the envelope of ‘not sure’. The moves in the curve seen yesterday are causing news headlines along the lines of ‘not this much since the last time’ to pop up in abundance. And did the Fed say that much? Apart from Bloomberg deciding to apply their red line of importance over news headlines in a seemingly arbitrary manner, there was little of great surprise other than what they were saying made sense. The surprise was more that the market was surprised that a major Central Bank is adaptive to circumstance and doesn’t plunge immediately ahead with what the market thinks it ought. Surely watching the European situation has taught us that.

So the response in the market appears to be more of a mean reversion as the oscillators of expectation once again snap back from stretched against the damped line of CB action.

European Growth. German data this week has been a scheisse show and though regional holiday patterns of German car companies can be partly blamed, it is undoubtably the best news that Europe has had for a while. Best as there is nothing better for European unity than Germany suffering great misfortune (well, up to a point and that point normally involving Krupps’ fortune). The FIGS (France takes Portugals place) must be looking up translations for Shadenfreude as they smirk into their wine glasses.

I can hardly see Schaeuble and Weidmann calming their calls against ‘alternative methods’ but their voices may well be muffled by the masters of German industry and with the Fed now openly quoting their concerns about global (read European) growth, Dr Aghi will now have plenty of prompters in the audience at his next performance mouthing his lines to him. So please, JFDI.

UK Lib Dem conference - At what point does the popularity of party become so small that even the role of kingmaker no longer applies? Listening to the UK Lib Dem's conference and you may be fooled into thinking that they will be in a position of power post 2015 and able to enact any of the promises that they are now making. For the record, if I get into power at the next election I will make it compulsory for vehicles travelling at less than the speed limit with more than five vehicles queued up behind to pull over and let them pass. There, as much chance of that as Nick Clegg being PM and I’m not even standing.

Oil - 20% down from July highs (19% in WTI and 24% in Brent) which apart form leaving my fracking stocks, like the gas they seek, three kilometres beneath the surface also means that all the drilling support and tech stocks are getting shellacked. Unfortunately that includes my ‘Graphene is the future’ stocks as graphene is also used to lubricate oil extraction. But there is good news. The energy tax on industry has been lifted by 20%. Manufacturing industry will of course be looking to retain this as additional margin and indeed it may give a fillip to earnings, but the world will cry doom as the deflationary impact hits the CPIs. But this is GOOD deflation and I for one am very grateful for it. Unlike all oil producing countries which of course include the Middle East, Russia and….. Scotland. I haven’t seen any conspiracy theories out there yet saying that collapsing oil prices are a huge manipulation to defeat the enemies of the West but we can’t be far off.

Volatility is back but the lesson of 2014 has been to fade every break out leaving me with the evil thought that the cruelest blow to the markets from here to year end would be a collapse in volatility. The uber popular USD bull story has seen some serious retracement, especially in the usdjpy and the usdjpy/nikkei spread where nikkei in usd terms has take a bath.

Japan appears to be in a bit of a quandary. A key pillar of driving Abenomics has been the inflationary impact of a weaker jpy and the relative spur to buy stuff now rather than later. But if the weakening currency is now of concern we are at risk of Abe issuing JPY and the BOJ buying them all back in exchange for USDs which effectively sees Japan doing US QE !

Perhaps instead ( and here is a cunning plan) they could issue JPY and then buy them against Euros, in effect doing Draghi’s QE job for him to the delight of everyone apart from Shaeuble and Weidmann who would have no control over it. Just a thought.


Anonymous said...

C Says
In a stagflationary post 2008 world price pass on non discretionary spending means any recovery is extremely uneven both demographically and by Industry. That's why I have said for years now there will be no sustainable recovery until such time as Energy and materials basically collapse. After you get to that point then then the broad world of business in effect get's a tax cut and the benefits of that can get more broadly distributed. In effect the commodity world had an upsurge in the '70's and went to sleep for a long time then woke back up with China/Asia and has enjoyed itself royally. It's their time behind the woodshed now. Not all deflation as you note is undesireable. A tanking commodity world is QE without the central bank to the rest of us.

Anonymous said...

C Says
I also note that a facet of the '70's shock was basically more people went to work and eventually this led to income based inflation in the 80's. Interesting to note that the latest shock has tended to lead to older people staying in the workforce longer by necessity. Now if we proceed to get back to fuller employment of the younger generation that have been so widely sidelined then eventually we might see a return to those conditions....but the big question of course is how long does that cycle take?

Polemic said...

As for the longer cycle, I do think there is about to be a hand over from old to young with respect to employment which gets accelerated as industry weightings change. If a manufacturing industry is replaced by a tech firm , or even if retail is replaced by online, I would hazard a guess that the net balance is older folks lose jobs and younger ones gain them.

The faster the change in economic structure the faster the young get employed.

Even Tesco shelf stacking can't be considered a safe, if low payed, option for the forced pre-retiree.

Anonymous said...

C Says
"Even Tesco shelf stacking can't be considered a safe,"
There goes my banker if I have bad few years.