Fed members Rosengren and Fisher – on opposite sides of the hawk/dove spectrum – both underscored a willingness to continue tapering heading into the trading week. That could have boosted the dollar and hurt risk assets. IT giant IBM also warned on profits in a blow to hopes for business investment.
Yet stock markets rallied nearly 1% and the US dollar sagged. We struggle to tie these events to news and instead point to strong weekend sentiment and talk about a bottom in stocks. The Treasury market was much more cautious with yields moving 1-2 bps lower.
There were also signs of strain in the periphery with Portuguese 10-year yields up 14bps, partly on talk of liquidation in Espirito Santo assets.
You could argue the market had a chance to get a better handle on the risks and has shifted worry to Europe. But that doesn't explain how the euro was able to climb against the US dollar throughout the day.
Overall, markets will need some better news in order to continue this rebound or it will quickly be over and the US dollar will resume its rally (excluding versus JPY).The news starts with Chinese Q3 GDP at 0200 GMT. The consensus is for 7.2% y/y growth and anything else would be negative. The question is: Would a miss mean more stimulus? Probably and that could make any dip a worthwhile buy in AUD/USD. Meanwhile, a good number would boost the Aussie on better global growth and continue to help nerves heal.
We doubt it. Periods of extreme swings in sentiment rarely end abruptly. For the moment, Bullard has calmed worries by adding a 'Yellen put' to markets but how much of a delay in the taper is now priced in? Unless some leaks slip from the FOMC that say otherwise, we suspect markets will put about an 80% probability on a taper delay by the time decision day rolls around.
The thing is, if the Fed disappoints, markets could go straight back to kicking and screaming -- perhaps worse.
At the same time, Europe is its own animal now and the economic worries there are real. It means every data point is elevated and AQR rumors will soon be rampant. Eurozone budgets are also in the spotlight with reports that Germany and France are in secret discussions to approve the French budget.
In the immediate term, the yen is slightly weaker in early trading in a sign that Friday's upbeat spirit will continue.Events to watch include speeches from the RBA's Kent at 2300 GMT and the BOJ's Kuroda at 0030 GMT.
Whether the Fed decides to buy another $15 billion in bonds through November is immaterial in dollar terms but it sends an extraordinarily powerful signal. Bullard hinted the Fed could delay ending the taper at the FOMC meeting at month-end. The comment reversed the rout on risk assets .
Bullard said it would be logical for the Fed to delay the taper because metrics of inflation expectations – like 5-year breakevens at 1.47% -- have changed the outlook.
The idea wasn't even circulating in markets before the comment and that it came from a Fed hawk like Bullard was a shock that instantly sent stocks higher, bonds lower and the US dollar down. Over the remainder of the day, the US dollar sagged around a cent on most crosses.
The sudden change re-establishes the idea that the Fed will forever back-up risk assets and tirelessly work to prevent any kind of shakeout or scare. Essentially, it's the Yellen put.
At the same time, evidence continues to show the US economy improving. Initial jobless claims and industrial production both hit post-crisis highs in reportswhile the Philly Fed was a touch stronger than expectations. If anything, soft retail sales report has been the outlier.
The underlying story is that Europe is slowing and once the shakeout is complete, markets will refocus on that theme.
In the meantime, a mini-bomb hit early in Asia-Pacific trading after the RBNZ inadvertently republished the report saying NZD moves are unjustified and unsustainable. The erroneous report sent NZD a half cent lower before it bounced on the retraction. These are volatile days.
Otherwise, the Asia-Pac calendar is quiet.
|Industrial Production (Sep) (m/m)|
|1.0%||0.4%||-0.2%||Oct 16 13:15|
|Continuing Jobless Claims|
|2,389K||2,380K||2,382K||Oct 16 12:30|
|Initial Jobless Claims|
|264K||290K||287K||Oct 16 12:30|
|Jobless Claims 4-Week Avg.|
|283.50K||287.75K||Oct 16 12:30|
|Philly Fed Manufacturing Index|
|20.7||19.9||22.5||Oct 16 14:00|
You know there's something inherently wrong with markets when each of the few recent rallies week was strictly caused by the Fed. Today's remarks fron St Louis Fed's Jim Bullard suggesting the Fed ought to consider delaying the end of QE is not a joke. Greek spreads are back and the yields dwontrend remains intact. Full charts & analysis.
Markets came unhinged in one of the wildest days in years. We're entering a period of exceptional volatility in markets and it's a reminder to manage risk because major moves will continue to hit. We examine what today's price action says about what's next. All 4 EURUSD & USDCAD Premium longs hit their final targets, while the USDCHF trades were stopped out, leaving NZDJPY and AUDUSD in progress.
The short version of what happened in markets Wednesday was that US retail sales were soft, with the control group at -0.2% compared to +0.4% expected. The Empire Fed added to the sentiment a 6.1 compared to 20.5 expected.
Sentiment was hanging by a thread after two weeks of elevated volatility and these reports sparked a full-on flight to safety. Traders rushed into bonds with 10-year yields falling as low as 1.86% after a break of 2.20%. Stocks went into a near-panic with the S&P 500 down by more than 50 points at the lows and turning negative for the year.
The story in FX is that Fed rate hike expectations have fallen to a 14% chance of a hike by July from 53% a month ago. That weighed heavily on the US dollar right across the board.
Notably, interest rate differentials trumped the demand for safety in FX. In general, a currency like NZD would lag on a day like Wednesday but it was the leader on higher rates. In addition, a solid milk auction underpinned the kiwi.
Looking ahead, every headline is a major headline in this environment. Sentiment will change by the minute and that makes preparation and defining risk/targets critical elements in trading. We urge our readers to remain confident but stay prudent.
In the near-term, the economic calendar is quiet but one event to watch is Australian consumer inflation expectations at 0000 GMT. The implied pricing for an Australian rate cut has risen to 50% for July 2015 and continued troubles would push that higher and sooner.
|Retail Sales (SEP) (m/m)|
|-0.3%||-0.1%||0.6%||Oct 15 12:30|
|Retail Sales (ex. Autos) (SEP) (m/m)|
|-0.2%||0.3%||0.3%||Oct 15 12:30|
|Consumer Inflation Expectation (SEP)|
|3.5%||Oct 16 0:00|