Hedging bets

Fed announces 15 billion dollar taper

The European Central Federal Reserve Bank of Australia and Japan; sorry, I mean the US Federal Reserve, were completely on message overnight, announcing a USD 15 billion per month taper to their USD 120 bio per month bond-buying programme, while at the same time, saying interest rate hikes were not on the horizon. Combined with a strong US earnings season, those noises were enough to keep the party going in US equities which traced out another record high. The US dollar edged lower while US yields firmed suggesting the street had gone into the FOMC decision long.

How the reality of the taper plays out over the next few months will be interesting. Mr Powell said something along the lines of inflation is still transient, but it could be transient for longer than expected. A rise in US yields over the next couple of months as the taper really gets going should continue to keep the US dollar in the driver’s seat, while hypoxia inducing equity valuations may find the altitude challenging, particularly if consumers start pushing back on pricing increases.

Asian markets, which have been late to the reopening party for obvious reasons, have their central banks lined up in supportive mode still, and rightly so. The stress of the taper could be felt in this region more than others, especially if, as expected, the US dollar rally continues, and US yields rise. That could lead to a burst of imported inflation if the region’s central banks choose not to spend foreign currency reserves defending their currencies. Thankfully this time around, those reserves in the region are bulging at the seams. Probably the elephant in the room will be China. If its slowdown continues, whether by material, Covid-19, property sector defaults or energy of supply-chain constraints, a move to a looser monetary bias and a weaker yuan would give the rest of Asia another headache, especially in currency markets.

The central bank world is rapidly splitting into two teams. Those in the lower for longer camp, forever if you are Europe or Japan, and those that are looking at the distortions caused by unconventional monetary policy, particularly on the young whose future wealth we are stealing with QE, and those on low or fixed salaries. Poland slipped in a 75bps hike overnight and they may well be joined by Norway and the United Kingdom this afternoon. US markets need not worry though; the Fed has signalled, like Europe and Australia, that they will come to the rescue at the first sign of trouble. It is no surprise, therefore, that the music continues to play across equities and other asset classes. You could even argue the crypto-boom is in part a function of the ham-fisted opioid monetary largesse from prominent members of the central bank space.

This week is a busy one still culminating with Friday’s US Non-Farm Payrolls data. Overnight, ADP Employment exploded higher, while the US ISM Non-Manufacturing PMI and sub-indices suggest that the services sector is back with higher activity and costs, after a Q3 delta-induced slowdown. The risks are now skewed towards the Non-Farms finally aligning with signals elsewhere in the US economy, after a few months of disappointments. A number north of 500K could cause equity markets to reconsider ignoring the implications of the Fed taper. Similarly, a low print will keep the lower-for-longer monetary party in equities going well into the night.

The Norges Bank and Bank of England rate decisions aside, I expect to see continued volatility in the energy space as OPEC+ meets today to decide if a change to production targets needs to be revised upwards. I would expect OPEC+ plus to ignore the pressure from COP26, I mean President Biden, to increase oil production. Oil prices fell overnight as inventories rose, but the announcement that the US and Iran would restart talks at the end of the month should be the death knell of production hike hopes from the grouping.

Australia’s Retail Sales rose by 1.30% MoM in September while the headline Q3 number by 4.40%. Market impact has been minimal to non-existent, as the reopening of Victoria and New South Wales, along with international borders, means those numbers will surely rebound strongly, helped along by their resident fence-sitting central bank. The data calendar is tier-2 in Europe and non-existent in Asia today with holidays in Singapore, Malaysia and India reducing activity.

US Initial Jobless Claims will attract higher than usual interest, thanks to being sandwiched between the FOMC and Non-Farm Payrolls. But I would argue to readers that the OPEC+ meeting will be the biggest source of volatility later today. And in case you thought it had gone away, units of China’s Evergrande have another US Dollar P&I totalling USD 82.50 mio due by this Saturday.

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