Thursday, 29 October 2015
Market post FOMC
The FOMC once again managed to surprise the markets. This time by being a bit more hawkish than expected. This fit in with the feeling I’ve had for the past few days that the market is pricing max ECB action and max Fed no action leaving risk for disappointment on either. The FOMC statement with its missing reference to exogenous pressures might have surprised some but the Polemic FOMC market expectation model is still performing .
It's a simple model that plots market interpretation of Fed intention against actual fed action. So simple in fact that I can express it like this.
The subsequent price action in assets was predictable, right up to the point it was not. A dump and rally seeing indices close near/at/through recent highs again depending which one you look at. I can only assume it was a battle over impact and reputation of Fed action. Stay low and it's stimulatory but ZIRP nuts, move higher and respect is regained but it’s less stimulatory.
This caused some jitters at Polemic Position Towers, but the view that risk things roll over again is intact. Asia coughed a ‘meh’ with the FOMC caught between a strong Western equity close and a tap back towards ‘Fed rise = bad for EM debt’ but with Western market looking soggy again we may well see some contagion flip back into EM, which starts the feedback loop into DM, rinse repeat etc.
Last nights FOMC just adds to the interest in the stretch between FOMC and ECB policy. The obvious plays are EUR/USD shorts and ESTOXX vs SPX but that is so obvious I am looking at EUR/USD at 'only' 1.0950 and deciding that though everything should be set for it to fall it will stuff everyone again by returning to the 1.1100 magnet again. the catalyst could well be an ECB expectation catch up. We have seen Fed expectation move post FOMC, we may well see ECB expectation shift from uber-dovish on the next squeak out of them. We can't get much more dovish than now can we?
The Euro/US stock spread isn't performing that well either today with the move down in European stocks hinting that the sell off is going more general and with that in mind and the hefty falls in UK stock the mighty peaking US markets could be seeing the still kicked from under them ready for a catch up
In the last post (not the bugle call, though it may be apt in equities if my feelings play out) I said oil was the key to many thing and had pretty much thrown the towel in on seeing it rebound meaningfully. Well, add me to the list of oil counter indicators as the stuff shot up 6% as soon as I said that. But despite that my oilly stock things are still getting 'Shell'acked suggesting that the belief in the rally is not complete.
One last point on Central bank expectations. I wrote this a couple of years ago and it remains as pertinent now as it did then
And the US? We have been throwing around all sorts of arguments and analogies, most of them medical ranging from tearing off the plaster of QE as quickly and painlessly as possible, to continued methadone prescription, to amputation and stem cell therapy. Once again, as with Japan, it all rests on continued confidence and here we have a balance between confidence in the continued supply of liquidity if the economy needs it against confidence in long term Fed policy, the two being slightly different. The other point of confidence is who follows whom. the market the fed, the fed the data, the market the data or the Fed the market. We would prefer to think that the Fed will, as they keep stating "do what is necessary" (as the ECB also keep saying) to which point they will try and play the Goldilocks scenario of just the right amount for any situation.
We would like to remain confident that despite the wild oscillations in central bank expectations the central bank Governors are indeed Governors - Those big Brass Balled governors on the steam engine of the World's economy and they can’t afford to choke off what confidence may finally have emerged.