The global market-place had been holding is breath all week for the Thursday FOMC decision on rates and the statement from Yellen which was sure to follow it. The mountain of speculation that preceded it had distilled by the early trading session on that day to two main possibilities, hawkish doves, or dovish hawks. Let me explain: Had they raised the language was expected to be significantly soft to prevent multiple reactions and repercussions in the fragile global environment. The alternative was no rate hike but an upbeat statement with a measure of assurance of an October or December hike on the back on improving US statistics and evidence of an improving economy.

Neither happened. What we got, unequivocally, was dovish doves sending a chilling message to the interconnected market place with the attribution firmly laid on China’s doorstep.

The reaction that followed was at first expected and then rather telling by close on Friday  and weighing the consequences will give some clues as we enter yet another potential three month period of more of the same…speculation. There is one huge vital element to enable the search for opportunity in such a market place and that is sentiment, so that is where we shall begin.

 

Finding The Edge:Risk on-Risk-off

The biggest risk of dovish doves is risk itself. The environment is fragile and the rhetoric from Yellen did nothing to soothe nerves referring as she did to the global economy concerns and how they may’’ restrain economic activity somewhat’’  I think maybe the word somewhat will now come under the microscope. What she followed up with was even more worrying…that the Fed may reconsider ‘endorsing’ negative rates. Statement such as that slipped in  to the reasoning will not be missed especially post week-end when all has been taken into account.

 

The Friday Effect

 What actually happened in the markets on Friday will give the reliable light on current sentiment;

The S&P, began as expected by rallying, but it turned in the afternoon. Now back inside a tight range and depending on the first assessments of sentiment in the first London session of the work this still represents a short opportunity. The fact that the US equities were not sustained by the Fed decision is an important reflection of the market mood. Let’s see what follows through.

 

 

European Equities, also unnerved, both the Eurostoxx50 and the Dax have broken out of the consolidation to the downside, giving potential shorts again;

The VIX, briefly below that important 20 average rose over 4% by close;

chart courtesy of stockcharts.com

Bonds, the US yield was pushed down as bonds rose, this was to be expected on a dovish message;

Elsewhere the same effect;

Commodities here shown in their index; again from stockcharts.com;

 

All these charts show critical points in ranges, so this week could provide some important insights.

Copper, looking very bearish and despite the earthquake in Chile which boosted it for a while;

Oil, another bearish scenario, and again locked inside the range it has been in since August 28th:

 

USD Index. This dropped, again as one would expect, but by close had returned to the place it started and the technical positioning cannot be underestimated…it was at open in a critical place to see just where the USD may go next. Certainly it was another crucial close at the week end;

 

 

Finding The Edge:The World Watches China

 The Fed have undoubtedly intensified the monitoring of the Chinese situation not just by themselves but by all. So it seems we switch from focus on US data to Chinese for Fed speculation.

Bearing in mind that data from China is not exactly seen as reliable this poses a few problems.Last week we looked at the dislocation between Chinese CPI and PMI, and this week following last month’s miss we have the Caixin flash PMI again. Certainly one to watch.

 

The USD economy

So what is really going on in the US. The Fed were not just confining their comments to the global crises. They have downgraded both inflation forecasts and growth projections.

Earnings growth this week (or rather, lack of it) shows the US economy is not as robust and we may have previously thought;

Despite all this it is the reserve currency, it is still the strongest relative currency and recovered its losses by the close on Friday against all it’s major pairings.

We also have to remember it is a safe haven if gloom really sets in.

Yesterday, we heard from Fed member Lockhart, still seeing solid improvement in the US and anticipating a hike before the end of the year. So hawkish elements returning before the week was even properly under way. The speculation will be with us for the duration and thus the volatility and potential choppiness. The USD index shows a different face  already;

Here it is again with a weekly trend line underneath;

 

 

The dual nature of the UK Economy

Here we see the possibility of Carney following the American lead and citing global issues to cool off the rate hike speculation maybe even beyond March 2016. The other side of the pound coin, is that wage growth is developing, better than it is in the US. The data was good this week. There is also an argument that Britain is less exposed to the China syndrome. I still favour longs against the commodity set, and in particular the NZD  and the EURGBP short. New Zealand had some improved data so a wait on the pullback in that pairing will be what’s required.

Finding The Edge: The Week Ahead;

 

Results in the Greek election, show a slim victory for the  Syriza party.

In Canada, Poloz will speak on monetary policy on Monday

Japanese holiday until Wednesday

Chinese flash PMI Wednesday. EUR PMI and Draghi speaking same day. Trade balance from New Zealand and core retail from Canada

On Thursday More QE in the Eurozone, USb Core durable goods and more from Chairwoman Yellen

USD final GDP on Friday

Not a huge news week but some movers in there and the all important sentiment factor is the major focus.

 

The ‘Safe’ Play

There are other possibilities outside the immediate ambit of the speculation. For this week shorts in the EURGBP are attractive and longs in the AUDNZD. Based again on strengths against weaknesses. Should risk off assert itself then theAUDJPY is my pair of choice. Shorts of course.

For a while the emerging markets earnt a respite,  as have commodity currencies but after Fridays fresh falls that may not last long.

In this context, just one more chart shows how the emerging markets may fare against the Dollar, using USDSGD  where the SGD enjoyed a post meeting rally, but gave back the gains and just look how it has proceeded in the first two days of the week;

As for the USD, we were looking at the potential for US correction after Thursday and it will remain vital to watch the index on an ongoing basis.  This is the circular issue; If circumstances improve in China (and it’s a big if) then the rate speculation for a near term hike will begin anew.

If it deteriorates any further, emerging markets will suffer first and further.

Furthermore, if that scenario plays out, then the risk environment may well deteriorate with it bringing with it the desire for safe havens. That includes the USD. Any shorts in the USD that seemed likely as a result of Thursday’s decision have to be taken in the light of that bigger picture and it could be argued that there is little room for the USD to descend. The index remains our point of reference and that will dictate direction .

The key was, is and will remain a question worth asking everyday…what is the market thinking? How is sentiment affecting the big players, is where that all important edge lies. In a market as volatile and unpredictable as this one it is well worth the search.

 

Judith Waker

 

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