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Simon Smith

Risk rating

The market is in need of a new narrative. The Fed meeting in December is too far off and for now, the US election is not something that entices excitement. With central banks on hold, markets are pushing the envelope in terms of risk, so pushing risk assets ever higher. Whether we are extremes is always up for debate. The German 10 year (not a risk asset) has been pushed below the zero level once again, but such moves have prompted rallies elsewhere. We’ve seen corporate bonds outperform, with ...

Simon Smith

Moving on from the Fed

The reaction seen in currency markets yesterday to respective central bank policy decisions was instructive of the change in dynamics that we’re seeing. The BoJ enacted a number of changes to its policy regime, which initially weakened the currency, but left it stronger by the close of play. Some of that move was no doubt down to market positioning, but it’s also reflective of a market becoming more and more doubtful about the ability of the BoJ to have any impact on the deflationary mindset ...

Simon Smith

Bank of Japan runs out of road

The Bank of Japan delivered a whole heap of nothing at its policy meeting today, although some adjustments were made to its policy framework. If you take the time to read through these measures, then the impression is of a central bank that has largely lost the monetary plot and is undertaking an ever more complicated and convoluted approach to monetary policy. The new regime is called “Quantitative and qualitative easing (QQE) with yield curve control” but there is also “QQE with a negative ...

Simon Smith

Sceptical equities

There was a definite yield differentiator on yesterday’s moves against the US dollar, which was generally in retreat. Those gaining the most were those with the highest interest rates, such as the South African Rand, the Aussie and also the kiwi. The Swiss franc and euro were less eager to join the party. This underlines the view that the market was getting more confident on the likelihood of the Fed keeping interest rates on hold at this week’s meeting. The other point of note was the modest ...

Simon Smith

Waiting for nothing

This week is all about what central banks aren’t going to do, but also the limited impact of what they’ve done already. The FOMC meeting in the US unlikely to produce a change in policy. Market pricing is now only places a 20% chance of a hike in rates this week and just over 50% chance of a hike before the year end. This could mean that the Fed chooses to come out with a steady rate decision, accompanied with a slightly hawkish statement, so as to effectively modestly tighten policy via their ...

Simon Smith

Central bank confusion

A few years ago central banks were all about offering clarity, also known as forward guidance. Now, they appear to be offering confusion. This seem to be apparent amongst most of the majors. The odds of a Fed rate increase this year have fallen further and are now less than 50%, this a few weeks after most Fed officials were doing their best to steer the market towards the next move, perhaps as early as September. In the UK, although the BoE kept interest rates unchanged yesterday, the MPC said ...

Simon Smith

Subtle signs for sterling

Sterling was sagging in early European trade as we head into today’s MPC meeting. This is really about gauging subtle shifts in MPC thinking since August, when policy was eased and a decent indication was given that it may have to be eased again later this year. On the face of it, the data has not been shifting this way, so the potential for sterling volatility is largely going to come from any change in this perception as revealed in the minutes to the meeting. Initial cable resistance comes ...

Simon Smith

Coasting into the Fed

Considering that Fed’s Brainard had put another nail in the coffin of a Fed rate hike this month, the dollar was on decent form yesterday, gaining against most of the major currencies. The dollar and kiwi were particular soft, whilst sterling was not far behind, helped by softer than expected inflation data. The better dollar tone was largely came on the back of the weakness seen in equities, which are having something of a roller-coaster few days. Note that we have further UK data today in the ...

Simon Smith

Brainard sticks to her roots

So, the theory that the last Fed speaker before the pre-FOMC purdah sets in was to lay the groundwork for a September hike was largely blown to pieces last night as Brainard stuck to her dovish leanings in her speech. She made the point that there is no rush and that the damage from moving too soon outweighs the risks of waiting too long. The market now puts the chances of a hike nearer 20%, compared to the 30% prevailing for most of last week. That said, there has clearly been a dis-connect ...