Not sure this was the reaction the Fed were looking for when they decided to pause and give a shout out to the struggling EM economies and global economic risks. Markets decided on Friday, in the European and US sessions (Asia, not so much) that there was truly something to fear from the Fed’s concerns. Accordingly, equities were very soft (S&P -1.6%, DAX -3%, Shanghai +0.4%). Yields were lower (US 10yr 2.13%, Bund 10yr 0.662%). The irony is that the USD was higher (DXY 95.15) and the EUR was lower. Oil prices were lower (QWTI 44.68), Gold 1132, just marginally up and iron ore $57.69.

What the Fed has done, and we can see why they are concerned about the stronger USD and lower oil price effects, is to lay their indecision at the feet of policy makers in other countries. But these policy makers face the same conditions. And not everyone can have a weak currency at the same time. Cue the increased probability of easier monetary policy in other markets to compensate for the Fed’s freeze. That pushes the USD higher, so the Fed baulks, and so we go. Currency wars through unconventional policy. And this time equities don’t like the thought of more QE because the underlying economies are tipping to worsen, not improve, given the incremental benefit of QE from these levels is questionable. We had a lot of this talk in the last 36 hours and it is only going to continue.

The ECB: Praet and Coeure both highlighted the fact that the ECB is ready to do more to support the economy if necessary. “Won’t hesitate if inflation is at risk” says Praet, “can adapt QE asset purchases if there is a downward risk to inflation” says Coeure. He also noted that they could extend QE beyond 2016. The ECB are not going to be content with EUR rising in this environment so expect more commentary as and when it does. This raises the changes of a policy move in October.

The BoE: The BoE’s Haldene also raised concerns about the level of GBP, noting that they “needed to take the effect of a strong pound seriously” and that the case for a hike is not pressing. This brought GBP off its highs.

The Fed: The Fed speakers post the decision helped the USD and didn’t calm equity markets as it was the day of the Hawks. Bullard (hawk, voter 2016) said he would have been a dissenter and that they are ready for liftoff in 2015. He acknowledges market volatility, but still feels they are getting behind the curve. The sheer circularity of this global environment is shown by Bullard blaming the ECB and their QE for the Fed’s strong USD problem. Lacker was the hawkish dissenter and spoke accordingly.

And Williams (voter, neutral to hawkish) did acknowledge the uncertainties but worries they may get behind the curve. The one thing he did note that was a little different was the Fed was not out of “ammunition” (ie more easing) but didn’t feel they would need it. (But you know, if the other central banks go down this path and the USD strengthens, just saying).

There are many central bank  speakers this week, and little data, we should expect more of the same.

In Australia, CoreLogic RP data are reporting lower auction clearance rates for this weekend, with the overall at 70.7% – (the SMH suggested it was the lowest spring rate for three years). This is partially a function of the large volumes coming onto the market, as well as softer demand.

Coming Up

Domestically, we get house prices from Q2, but with the latest numbers suggesting a little softening, the official ones are probably not going to move markets. New Zealand is equally quiet, with net migration and trade data.

China release the Caixin PMI (Tues), which in the current environment of uncertainty regarding the Chinese economy, will get a lot of attention. A small improvement is expected.

The US is far less about the data this week and more the central bank clarification, or otherwise. We get house sales but housing has been okay of late. The durable goods and PMIs (Markit, Richmond, Chicago) are all volatile and particularly so of late. The Uni of Michigan survey is the final release and less market moving.

However, there is a plethora of Fed speakers. The key will be Yellen on Friday and perhaps she can explain the rising risks and lower inflation bent in the statement and projections against the speech’s bias to still move ahead with a hike at some point. We also get Lockhart (voter, neutral) three days in a row – clearly wanting to get some message across. Bullard (non-voter, hawk) and George (non-voter, hawk) round out the week.

With the calls for more easing from the BoJ, the Japan CPI release on Friday will be interesting, if not market moving.

In Europe, we get the Markit PMIs and the German IFO, which should be ok. But there is also a range of ECB speakers. Draghi is the key, but Praet generally has something interesting to say; Couere, Nowotny also speak.  If they want to reinforce the idea that they will do “whatever it takes” and expand or extend QE, then it may temper EUR from its recent highs.

Overnight

On global stock markets, the S&P 500 was -1.60%. Bond markets saw US 10-years -5.67bp to 2.13%. On commodity markets, Brent crude oil -3.28% to $47.47, gold+1.9% to $1,138, iron ore +0.6% to $57.69. AUD is at 0.7183 and the range was 0.7164 to 0.7280.

For full analysis, download report:

• Markets Today: 21 Septemebr 2015 (PDF,267KB)

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