09:00 AM (EST) Update
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The month of September is coming to an end and global markets are testing important levels. The Fed is also testing market participants patience and keep on projecting contradicting signals when it comes to a rate hike. Here is an overview of what’s been going on beginning of the week and what’s to come.
Oh, and I know I was absent from the markets yesterday and you probably really really missed me (wishful thinking on my side?)
I was at a Japanese political event and got a chance to hear Japanese Prime Minister Shinzo Abe speak about Japan’s economy. I also asked a few Japanese governors about their thoughts on the Japanese Yen. Don’t worry, I’ll tell you all about it in this update.
It was not a good day for global markets yesterday. Risk aversion was the main theme, as Glencore’s shares crashed by almost 30% in the London session. The commodity giant’s suffering led to a large risk-off move, with investors starting to think that what began looking like a market shake down could be leading to a fully-fledged crisis. The FTSE closed lower by 2.5%, pretty much the worst performer in Europe, and it looks like more of the same today, with futures pointing lower by around one percent.
The retreat to defensive positions led to an interesting outcome in the currency market, with investors treating the euro as a safe haven. The single currency rallied heavily against Sterling overnight, as a temporary lack of additional QE action from the ECB has led investors to seek the deep liquidity and relative stability of the currency.
According to the FT, the Serious Fraud Office is investigating whether the Bank of England rigged the emergency liquidity auctions they held at the start of the financial crisis. There are claims the Bank told banks what prices to bid at so as to minimize balance sheet distortions and therefore make things seem better than they were. The SFO will have to decide whether it is in the public interest to pursue the investigation.
Fed Members’ Rate Hike Projections
Something is definitely afoot at the Federal Open Market Committee (FOMC) in the US, the body that has the responsibility to raise or not raise interest rates in what is still the world’s largest economy. Last week we had Fed head Janet Yellen, letting us know that in her assessment rates will indeed start to rise before the end of 2015.
It would now appear that the management of expectations has begun in earnest, because no less than three members of the committee were on stage yesterday, at various venues, to give us their opinions on the state of the economy and how it might impact monetary policy. They were Fed Evans (Chicago), Fed Williams (San Francisco) and Fed Dudley (New York).
Fed member Evans said the Fed should be ready to provide more accommodation should things weaken very much. Despite this claim, he sees three rate hikes of 25 basis points by the end of next year. Adding further contradiction to his words, he said the Federal Reserve will consider the impacts of a stronger Dollar, which will almost certainly continue to strengthen if the Fed does choose to raise rates by three quarters of a percent over the next year.
All in all, it seems that there were more doves than hawks this time around. Evans expressed concerns about hiking interest rates too early, Dudley gave more cautious remarks, Williams reiterated his upbeat assessment, and Tarullo was on a completely different universe.
Keep in mind that along with Ms. Yellen, they’re all voting members of the policy making committee, which suggests that we might see at least three officials (out of 10) calling for tightening by October or December.
Fed members are scheduled to deliver more speeches in the final days of September, and something tells me they are going to continue giving us mixed messages. Boy I wouldn’t want to be dating any of them. Imagine how many mixed signals they would be sending in a real relationship!!
In Asia, markets have had it worse than they did in Europe. Glencore’s Hong Kong listing fell slightly less than its London stock, but only marginally. BHP Billiton saw its worst performance in Australia for more than six years which put almost every regional index lower by more than three percent.
Japanese Prime Minister delivered some optimism at the New York event regarding the economy of Japan and its relationship with the US. It appeared to me and Mr. Abe really is passionate about making Japan a more international place open to foreign investments, which also signals they are very happy with the weak Yen and the strong dollar, potentially rooting for a stronger USD/JPY to help their international trades.
However the rest of the Japanese governors were favoring stabilization of the Japanese currency which basically explains the reason why Mr. Japanese Yen loves to range. Any changes that may come to the USD/JPY pair would probably be a result of a Fed rate hike at this point and this week’s US unemployment rates and Non-Farm Payrolls (NFP) could give the Fed the satisfaction and confirmation to actually start the rate hike.
What do you think is going to happen in October?