The Fed appears to be ready to raise the Fed Funds rate by 75 basis points this coming Wednesday if market rumours are to be believed. The question that has to be asked that if those loose lipped members of the FOMC have leaked enough of this going forward into the announcement to ameliorate the damage to markets.
Having been resolutely behind the curve for some time, it appears that the Fed have finally managed to take that pesky nuisance of inflation a tad more seriously. Is a rise of 75 basis points going to spook the markets into a further rout or is it baked into traders expectations? Well, we won’t know that until Wednesday but the market’s initial reaction is normally wrong and any sell off is probably a buying opportunity, given the level of gloom and the fact that we are back to yearly lows once again.
It’s hard to find any positives at the moment with the oil price nudging $122 per barrel and the 10 yr at 3.3430, up nearly 6% on the day. We are approximately 20% off the highs, indicating a bear market, but I suspect that we have been in a bear market for some time and as we all know, bear markets spend a third of their lives rallying. The Vix is finally showing signs of life, currently at 33.21 and should there be any hysteria on Wednesday with the Vix spiking into the 40s or 50s, a buying opportunity will occur. Once we have the over the top reactions from the shell-shocked commentators at CNBC, always a great counter indicator, the basis for a rally will be in place.
But let’s make one thing clear, I am not advocating the start of a new bull market, anything but. Any rally from these depressed levels will be hard and fast, enabling the fleet footed and brave, some might argue foolish traders to engender some healthy profits but do not fall in love with any rally as that is all it will be.
Other central banks are even further behind the curve. The BoE are expected to raise rates by 0.25% basis points on Thursday with the UK probably already mired in recession. It, like other central banks has forgotten it’s primary duty in life is not pumping up asset prices but price stability.
Andrew Baily , the rotund Governor of the BoE, and a rather uninspiring one at that, seems keener on imploring the working class not to make ”unreasonable wage demands” with inflation at 8%, rather than getting to the nub of the problem. We can safely say that he’s certainly no Eddie George or Mervyn King, two of the most respected Governors of recent times.
I will touch lightly on the hapless Christine Lagarde, President of the ECB, where the grey beards of the Bundesbank must be tearing their hair out at her inaction. Let’s hope that none of them are reflecting on the hyperinflation that infected the Weimar Republic in pre war Germany.
The ECB is like a sloth in it’s decisions and Lagarde is a political apparatchik with a sketchy track record as a Minister of Finance and head of the IMF. At least the US has had some decent growth over the last few years and low unemployment. Igniting and sustaining growth in the EU with it’s high level of regulation and social security costs is a hopeless task. You might as well ask Amber Heard to tell the truth on the witness stand. The best thing Britain ever did was to vote for Brexit but they have been too timid to take the opportunity to turn Britain into the Singapore of Europe.
Just a brief mention of Japan, the Topix was off 3% today. They have been arch proponents of QE but their currency is collapsing and they are losing the tools to defend it . DB have put out a very bearish note on Japan today and I suspect they are correct. I was somewhat surprised that Warren Buffet made such a large investment in five Japanese trading houses last year at that stage of the cycle in a country he doesn’t know. He was showing a decent paper profit but as we all know, you question the Sage of Omaha at your peril.
In short, is everything baked into the bad news pie at the moment leading to a decent rally or are markets too weak to manage a decent rebound. All will be revealed to the legion of professional investors, traders and armchair followers out there in the coming days.
Be careful out there.