Dot-Plot Blindness has Dollar Bears Bailing

Thursday December 15: Five things the markets are talking about

The Fed did not surprise, they did what was expected of them on the headline, but it’s their foresight that has capital markets wildly gyrating.

The big takeaway from yesterday’s FOMC meeting is the increase in the pace of tightening that’s been signalled for next year. Policy members voted unanimously to raise its target for the fed funds rate up +0.25% to +0.5%- 0.75%.

In their communiqué, the Fed described an improving labor market, growth in household spending, but soft business investment. Inflation, although picking up, is still below their desired +2% goal.

The net result, the rate increase along with forecasts of “three-more” rate hikes (not the two that was being priced) and the accompanying rosier economic projections were decidedly more hawkish than expected, which favors the ‘big’ dollar, pressures equities and has sovereign yields backing up.

1. Global stocks see mixed results on dot-plot

Asian stocks softened overnight after the Fed hiked and hints at the risk of a faster pace of tightening than investors were positioned for.

With the Fed’s anticipated policy path, and expectations for Trumponomics to set U.S growth into a higher gear, is expected to keep other central bankers, in particular emerging markets, on edge as capital/cash gets moved from the fragile export-dependent regional economies toward dollar-based assets.

In APAC, Australia’s ASX 200 dropped -0.8%, while South Korea’s Kospi ended lower. The Shanghai Composite fell -0.7%, and Singapore’s Straits Times slid -0.8%. In Hong Kong, the Hang Seng Index traded down -2%, with property stocks leading declines, while a weaker yen pushed the Nikkei 225 higher.

In Europe, equity indices are trading generally higher ahead of the BoE’s rate decision (07:00 am EST). The FTSE 100 is underperforming as commodity prices buckle under strong dollar pressure. Financial stocks are trading higher on a higher rate path.
U.S futures are trading unchanged after the gauge suffered its steepest drop yesterday in two-months.

Indices: Stoxx50 +0.5% at 3,234, FTSE -0.1% at 6,941, DAX +0.5% at 11,301, CAC-40 +0.6% at 4,800, IBEX-35 +0.6% at 9,270, FTSE MIB +0.9% at 18,768, SMI +0.2% at 8,153, S&P 500 Futures flat

2. Oil stabilizes, gold at the mercy of the dollar

Oil prices have stabilized after yesterday’s sharp declines following the Fed’s action as a tighter market looms next year due to planned output cuts led by OPEC and Russia.

Brent crude futures are trading at +$53.89 per barrel, erasing gains made earlier in the week that had taken it to an 18-month high. WTI or light crude is up +0.2% at +$51.16 a barrel, after yesterday’s -3.7% slide.

A report this week from the IEA indicates that they believe that OPEC pumped about +34.2m bpd of crude in Nov – that’s +500k above OPEC’s official estimate, which was already a record. If true, this will undermines all the recent efforts by OPEC and its non-members to cut production.

In the short-term, commodity prices remain vulnerable to dollar direction. Spot gold prices are down -0.6% to +$1,136.66 an ounce, after sliding yesterday to its lowest price in nine-months (+$1,131.28).

3. Fixed income prices plummet

Trumps reflation trade has caught a second wind with global investors continuing to dump government bonds overnight on the Fed hike and their ‘dot-plot’ projections.

U.S 10-year yields have jumped to +2.606% in European trade, up from yesterday’s close of +2.523%. It puts U.S yields on course for their highest close in two-years.

This selling pressure has other lower yielding sovereign product under pressure. In China, its 10-year sovereign yield surged +22bps to +3.45% as a plunging yuan and hawkish Fed dampens market expectations of further monetary easing from the PBoC.

Down-under, Aussie debt yields increased +9bps to +2.88%, while 10-year JGB’s (Japan) backed up +3.5bps to +0.085%.

4. Dollar remains strong, looking for more gains

With a “hawkish” Fed anticipating U.S rates to tighten a possible three-times next year as opposed to the markets two-guesstimate has dealers and investors aggressively adjusting their currency portfolios.

The ‘mighty’ dollar remains strong, hitting its highest print against the EUR since March and is making an assault on the single unit’s lowest 14-year value (€1.0462). Against the yen (¥118.42), the dollar trades atop its yearly highs outright, while the pound (£1.2532) looks vulnerable ahead of today’s BoE rate announcement. The dollar index has also hit its highest print since early 2003.

Currently, the market expects the dollar to continue to gain as dealers move to price in higher U.S. interest rates. The onus will now be on market data to stop investors from pricing in more tightening.

5. SNB and Norges do what’s expected, the BoE is next

Earlier this morning, the SNB’s maintained its deposit rate in deep negative territory at -0.75%, as expected. It also maintained its three-month Libor target at -1.25% to -0.25%.

As per usual, Swiss policy makers indicated they are ready to intervene in the currency markets again as it continues to battle the “significantly overvalued” CHF ($1.0305).

Authorities slightly downgraded its inflation forecasts. They now see 2017 inflation at +0.1% vs. its previous forecast of +0.2% in September. It also shaved its 2018 forecast by -0.1% to +0.5%.

Elsewhere, Norway’s central bank (the Norges Bank) has held its benchmark interest rate unchanged (+0.5%), believing that the combination of slow and steady economic growth and a weaker NOK (€8.9803) would keep inflation close to its +2.5% target. Policy makers said they expect to keep rates unchanged in the months ahead, adding that a lower rate would increase the risks of house prices and private debt levels rising too quickly.

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