Market Buckles Under Fed Pressure

The 'sell everything' rout in Friday's trading sets the stage for a dramatic start to the week with all eyes on the Fed's Brainard. The CFTC weekly positioning report showed a rise in kiwi longs. Japanese machine orders are next. On Friday, Ashraf's Premium Insights closed the short DOW30 trade at 18180 for 400 pt gain.

The S&P 500 fell 2.45% Friday, US 10-year yields rose 7.5 bps, oil fell 3.6% and the US dollar jumped on Friday.

The message is nervousness. The market anticipated that Fed hawks would signal patience on hikes but Rosengren – who is a voter -- warned about the potential for an overheating economy Friday on the heels of similar comments from Williams late in the week. That was tempered by Governor Tarullo, who said we wants to see evidence of inflation first but the market had already hit some kind of tipping point and there was no stopping the moves as virtually all markets finished at the extremes.

For money managers, it may be a matter of risk/reward. Fed funds futures are pricing in a 30% chance of a hike and if that's accurate, the pain of getting caught out may have overwhelmed the rewards of Yellen holding off for another month.

Onto Brainard

The market also tends to send messages and this was the final opportunity to put some pressure on the Fed. Speakers Monday include Lockhart and Kashkari but the main event will be at 1715 when Governor Brainard speaks. She's a dove and it's the last time for the core of the Fed to send a signal. If she's hawkish in any way, the kicking and screaming from markets will continue.

Before that, Asia-Pacific trading includes Japanese July machine orders. The consensus is for a 2.9% m/m drop but that comes following an 8.3% gain.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR -93K vs -82K prior JPY +54K vs +64K prior GBP -90K vs -92K prior CHF +1.4K vs +8K prior AUD +39K vs +43K prior CAD +21K vs +22K prior NZD +6.1K vs +1.8K prior

There's finally some movement into New Zealand dollar longs. The volatility in the market over the last year killed the appetite for the simple carry trade. The bad news is that the kiwi fell 1.7% in the past two days of trading. Otherwise, there isn't much to take away here.