Markets Today: Not yet, but soon

Sitting, waiting for the Fed, in summer markets. That pretty much characterises the last day, which was surprising after the angst of the prior period.

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Sitting, waiting for the Fed, in summer markets. That pretty much characterises the last day, which was surprising after the angst of the prior period. The concerns over China were eased (somewhat, for now) and elsewhere markets were content to reverse some of earlier changes.

There was limited newsflow, most of which didn’t seem to get much attention from markets. The UK second quarter GDP was as expected (0.7%qoq) and better than Q1. That should help the BoE’s recent push to warn markets that they would like to hike earlier than the market thinks. This should be GBP positive, but didn’t have much of a push.

In the US, even a very soft consumer confidence result couldn’t get anyone enthusiastic about changing expectations. No one can say exactly why, but consumer confidence was at a low not seen since September 2014 (90.9A, 99.8P, 100E). House prices were also soft. Not to worry, apparently.

This is because the Fed is coming up and particularly at turning points in cycles, there is some uncertainty about the future policy track. So participants might as well sit and wait for the next day or so and see what Chair Yellen has to say.

Coming Up

The FOMC meeting is the focus locally too; coming around 4am Sydney tomorrow suggests a slow day for local markets.

The Fed are not expected to change policy today, but provide some guidance as to the first ‘lift-off’ of rates since 2006. It is possible that they change the risks to balanced, acknowledging the better employment market, but some inflation disappointment.

It’s been a long time between cycles. That prolonged period of policy easing has made markets nervous about the coming cycle and how various asset classes, including or especially those outside of the US, will cope.

Generally, in a recent investor trip, many clients did not want to focus on the September or December start in the Fed cycle, but rather the end point. How much and how fast is the Fed likely to raise interest rates; and how will the more integrated global financial market cope with that? Therein lies the uncertainty- and with the proposed new Fed Governor being of more of an international, FX bent – one that the Fed may also be keenly aware of.

So a September versus December kick-off will generate short-term moves in the USD and yields, but it is the path ahead that should be the most important factor. In that, the Fed is likely to reassure on a steady, and very slow, hiking cycle in the statement.

The eventual terminal rate (peak if you will) will be determined by the likely, lower, potential growth rate in the US but we shall see how that develops over time. And, how those assets used to a low risk premium come to manage a higher price for the risk premium.

This may be one factor that is placing Emerging Markets under pressure at the moment, as soft global demand and higher supply weighs on commodity prices. Additionally, the increase in leverage, globally and in different sectors, means there may be a higher sensitivity to interest rate hikes. This generates weakness, particularly in those countries with current account deficits. A promise of low and slow, from the Fed would be the most positive for risk assets; rather than a debate over September versus December initial move.

This broad uncertainty, and the volatility in the Chinese equity markets will likely be reflected in the China sentiment survey today. But it will be the overall direction of the Chinese equity market that should have an intra-day influence on local markets. On this front, the PBoC and regulators are likely to continue to reassure that they will support equities. How comfortable international asset managers are about those measures is a different and longer term story, but it should assist in short term stability. If it does not, over time, there will be a much broader reassessment of the risks.

Overnight

On global stock markets, the S&P 500 was +1.30%. Bond markets saw US 10-years +3.60bp to 2.25%. On commodity markets, Brent crude oil -0.69% to $53.1, gold-0.1% to $1,095, iron ore +2.1% to $53.45. AUD is at 0.7328 and the range was 0.7257 to 0.7345.

  • UK Q2 GDP 0.7%qoqA, E, 0.2%P
  • US consumer confidence 90.9A, 100E, 99.8P
  • US Case Schiller House px -0.18%A, +0.3E, -0.03P revised from +0.3

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