Fundamentals Displaced by Sentimemt, BoJ Next

Year-end is near and that means flows dominate rather than fundamentals. The S&P 500 roared higher while GBP led and CHF lagged. The Bank of Japan decision is up next. 5 trades from the Premium Insights are currently in  progress, 4 of which are in progress. USDJPY and AUDCAD are the trades with the most in the money with more than 200 pips each.  1of the EURNZD longs hit all targets, with the other in progress in the red. 

There is no coherent way to explain all the market reactions before and after the FOMC decision. If Yellen was dovish, the stock market rally makes sense but the rising dollar and yields don't make sense. If she was hawkish, why did the S&P 500 complete the best two-day rally since 2011? The nature of markets is in flux and not every market moves can be tied to the latest news.

Eventually, however, fundamentals matter. What might have been most-surprising about Yellen's press conference and the FOMC statement was the confidence in the outlook for 2015. Storms are brewing in Europe, Japan and the BRIC countries. It's was possible for the US to remain an island of strong growth in the 20^th century but it's not likely today.

The dollar was generally higher on Thursday but economic data painted a softer picture. The Philly Fed was at 24.5 compared to 26.0 expected and 40.8 last month. The Markit services PMI was more concerning at 53.6 compared to 56.3 expected. It was the lowest since June and the comments in the report were concerning.

“The extent of the slowdown suggests that economic growth in the fourth quarter could come in below 2% which, with the exception of the downturn caused by adverse weather in the first quarter, would be the worst performance for two years,” the report said.

At the moment, the market is unappeasably excited about US growth now and in 2015 but much of the growth in Q2 and Q3 was simply a rebound from a terrible first quarter. Go with the momentum now but tread carefully in January.

Looking ahead, the BOJ decision is the immediate risk event and it's usually delivered from 0230-0330 GMT. More easing is highly unlikely after it squeaked by in a 5-4 vote on October 31.