Despite the best efforts of policy makers of late to downplay the significance of the first Fed rate rise relative to what happens after that, global markets remain in the midst of rate rise ructions. The difference from the 2013 ‘taper tantrum’ is that that equity markets and emerging market currencies not US Treasuries are bearing the brunt, and that current market machinations are as much about China as they are Fed policy-centric.  At least one thing hasn’t changed: Usain Bolt is still the fastest human being on the planet.

US stocks swooned for the second day running on Friday, the 3.1% fall in the Dow bringing the cumulative decline since the May 19 peak to just over 10%. The S&P500 lost 3.2% and the NASDAQ -3.5%. European stock indices were also +/- 3%.  As was the case Thursday, the underlying source for the correction was market developments/news outside America (read the weaker than expected China PMI and 4.3% drop in the Shanghai Composite). The 8.9 point jump in the VIX to 28.03 – the biggest one-day rise in four years – brings the rise on the week to 118% and to the highest level since the peak of the first (2011) Euro zone crisis.

There are many in the market, who like us, have long felt that September was a more likely date than December for Fed ‘lift-off’ given the amount of credibility Fed chair Yellen has vested in acting this year and so as to avoid the risk of becoming a hostage to fortune by waiting until December.  The Fed has just become exactly that – a hostage to (domestic equity market) fortunes.  Two weeks ago, San Francisco Fed President John Williams re-framed the Fed policy debate into a question ‘Why not?’ (move soon) rather than ‘Why?’, suggesting that bad things would have to happen between now and September to stop the Fed moving.  The fact risk markets are swooning at a time when money markets are only attaching about a one in three chance of September lift-off likely means that equity markets will almost certainly need to come roaring back in the coming few weeks to get the Fed onto the starting line, alongside some undeniably robust US economic data.  Friday’s one US data print, the Markit manufacturing PMI, underwhelmed at 52.9 down from 53.8 in July.

Friday’s FX price action again demonstrated the divergence been how FX markets have been travelling for months with respect to confidence in the Fed lifting rates no later than September, and interest rate markets.  On almost any other occasion in recent years – and especially since the GFC, you would have safely bet on the dollar being higher not lower if confronted with this sort of equity price action and the strength of the safe haven bid under Treasuries.  Outstanding positioning speaks volumes, with long EUR/USD and long USD/JPY positioning almost certainly more extreme than suggested by recent IMM data and which have the JPY and EUR net speculative shorts well back from early year extremes albeit still both of significant size. And/or, perhaps it is just that the dollar longs are proving more vulnerable to peak northern hemisphere summer liquidity constraints).

AUD did remarkably well Friday, down just 0.3% to 0.7316 so well off its post-China PMI lows. Again, the extent of prevailing short positioning looks to have been key here.  NZD fared much better than AUD (AUD/NZD -1.1% to 1.0940) with NZD/USD +0.8% to 0.6686.   Elsewhere in currencies it was again a day of underperformance for oil-linked currencies with the active WTI futures dropping below $40 for the first time since 2009.

In rates markets, US 2yr. Treasuries ended the NY session -3.7bps at 0.6168 (down 10.5bps on the week) and 10s -3.1bps at 2.0365 (-16bps on a week ago).

Coming Up

It’s not a big week ahead as far as the known data and events calendar is concerned, but that is no deterrent to another week of potentially dramatic price action across asset classes and which in turn can further fuel the ‘will they won’t they?’ debate regarding September Fed rates lift (or crawl) off.  China fixes (amid fresh upward pressure on USD/CNH), Shanghai and US stock market performances and the actions – or lack thereof – of Chinese policy makers, promise to keep markets rapt.

Locally, the known highlights are the Q2 capex reading together with updated projections for the 2015/16 fiscal year.  Glenn Stevens speaks on Wednesday at a National Reform Summit being organised by the AFR.

Internationally, Fed speak will be important with now less than a month until the Sep 17/18 FOMC meeting.  Lockhart speaks Monday, Dudley gives a press conference on Wednesday and the annual Kansas Fed/Jackson Hole symposium begins Thursday and runs through the weekend. Like last year, is again not slated to attend.

U.S data wise, durable goods orders (Wednesday), New Home sales (Tuesday) and the July monthly personal income spending and (more importantly) PCE deflator readings look like being the highlights. Elsewhere the German IFO survey Tuesday and Japan CPI (Friday) will both be of interest.  There’s no major data out of China.

Overnight

On global stock markets, the S&P 500 was -3.20%. Bond markets saw US 10-years -3.14bp to 2.04%. On commodity markets, Brent crude oil -2.49% to $45.46, gold+0.6% to $1,160, iron ore +0.5% to $56.10. AUD is at 0.7292 and the range since Friday’s local close has been 0.7285 to 0.7360.

For full analysis, download report:

• Markets Today: 24 August 2015 (PDF, 287KB)

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