• AM Bulletin: Investors revel in Fed’s “Goldilocks” worldview

    Indices Update

    US stock indices flew higher yesterday so kicking off the week in bullish fashion. Investors had the whole weekend to carefully parse Federal Reserve Chairman Janet Yellen’s Jackson Hole speech. Judging by the market reaction it would seem that they believe that the US economy is doing well, but not well enough to justify a September rate hike - a “Goldilocks Scenario.” Investors continue to search out a return in a low-yield world. This means that many fund managers are increasing their exposure to equities while decreasing their bond holdings. This is a riskier strategy. However, the actions of central bankers over the past twenty years (and particularly since 2008/9) will have convinced investors that there’s now very little risk in holding a diversified portfolio of equities with a small percentage of bonds. Let’s hope these investors aren’t deluding themselves. At the end of last week we heard that core inflation in Japan showed its biggest month-on-month drop in three years. Yesterday morning, the US Commerce Department issued its latest update on Core PCE. This is the FOMC’s preferred inflation measure and differs from the CPI (Consumer Price index) as it only measures goods and services targeted towards and consumed by individuals. For the fifth month in a row the figure hovered around 1.6% annualised. This is still some way below the Fed’s 2% inflation target. Once again, here’s a reason why the FOMC is unlikely to raise rates next month. But this won’t stop Fed members doing everything they can to persuade investors that September is still “live” in terms of a rate hike. In an interview with CNBC yesterday Fed Vice Chairman Stanley Fischer said that Janet Yellen's speech last week was” consistent” with a rate hike in September and another one prior to the year-end. In other news, on Sunday, Germany's economy minister, Sigmar Gabriel, said trade talks between the EU and the US had failed "even though nobody is really admitting it”. Herr Gabriel pointed to a lack of progress on any of the major sections of the long-running negotiations over TTIP. Sounds like it now could be the EU rather than the UK who will end up at the back of President Obama’s trade talks queue. The FTSE 100 was closed for the August Bank Holiday The German DAX fell 43.3 points or 0.4% to end the day at 10,544.4 The US30 closed up 107.6 points to finish at 18,503. The S&P 500 rose 0.5% to close at 2,180.4 while the Nasdaq 100 rallied 0.2% to close at 4,791.1

    Equities

    Investors are keeping a close eye on Arm (ARM) today as shareholders vote on its proposed takeover by Japanese giant SoftBank. There has been some opposition to the deal from former City minister Lord Myners. He dismissed a promise made by SoftBank over jobs together with a commitment to keep the head office in the UK, saying their legally binding nature is untested. Despite these misgivings, it looks as if investors in the Cambridge based chip-maker will back the £24.3billion cash deal when it goes to a vote at 10:00 BST this morning.

    Commodities Update

    Crude oil put in a sharp rally over the first few weeks of August. However, it appears to have lost some of its upside momentum. Oil was lifted initially after troubled producers Venezuela, Ecuador and Kuwait posited the idea of an output freeze in a bid to push the price back up to $60 or beyond. This story provided the perfect excuse for traders to pile in on the long-side and trigger a short-squeeze. This was despite everyone knowing that back in April discussions to freeze production went nowhere as OPEC member Iran refused to attend the Doha meeting. Back then the country was desperately ramping up production following years of sanctions. Yet Saudi Arabia refused to agree to an output freeze if Iran was exempted from any deal. Once again, Iran looks likely to be crucial to the success (or otherwise) of fresh talks due to take place in Algeria next month. And once again, it all hinges on whether Iran will be granted an exemption or not. At the end of last week Reuters reported that Iran will cooperate (with other producers) "so (sic) long as fellow OPEC members recognize its right to regain lost market share, the country' oil minister said on Friday." This seems unlikely unless Saudi Arabia reverses the position it held at April’s meeting. And as one analyst observed last week, the Saudis would probably rather see crude prices fall further in order to cripple the US shale oil industry. Technically, both WTI and Brent are hovering around the 23.6% Fibonacci Retracements of the August rally at $47 and $49 respectively. Gold and silver have both had a rollercoaster ride in both the lead up to, and the aftermath, of Janet Yellen’s speech on Friday. Both metals slumped last Wednesday after an unusually large sell order in gold was placed on the open of the US futures exchange. This sent the gold price down $10 in the space of a few minutes and silver tanked in sympathy. Then on Friday, both precious metals fell sharply as the headlines from the Fed Chairman’s Jackson Hole speech appeared. The initial takeaway was that there was a decidedly hawkish tone suggesting that the US central bank could raise rates as soon as September. However, gold and silver suddenly reversed direction and rallied as a deeper reading of the speech suggested that the Fed was still cautious in its assessment of the US economy. In the end investor uncertainty meant that gold and silver “round-tripped” ending Friday’s session little-changed. Both metals will look vulnerable to further selling if the US dollar continues to rally.

    Forex Update

    On Friday, Fed Chair Janet Yellen claimed that the case for a rate hike had strengthened in recent months. She also said that the US economy was continuing to expand and had reached maximum employment with price stability. Nevertheless, she said she anticipates that gradual rate hikes would be appropriate and left open the timing of what would be the first increase since December 2015. These comments were undoubtedly hawkish and initially the dollar flew higher.  But it reversed direction as traders scanned below the speech headlines. Dr Yellen went on to say that the overall economic situation remains uncertain and that additional tools may be needed to help promote a stable and healthy economy. Consequently the Fed Chair managed to keep all options open and provide something for both the doves and hawks. Nevertheless, investors again have to reassess the probability of a September rate hike from the Fed. They currently believe that the possibility of a rate rise has increased and this has helped to push the dollar back up again. The USDJPY got an additional boost after Bank of Japan (BOJ) Governor Haruhiko Kuroda said at Jackson Hole on Saturday that there was ample space for further easing of monetary policy via QE or by cutting interest rates deeper into negative territory. But it’s worth remembering that ahead of Jackson Hole, the dollar was trading at the lower end of an 18-month trading range. It has moved away from here thanks to apparent Fed hawkishness, and BOJ dovishness. But it could be that these are just short-term moves which will quickly reverse if investors suddenly realise that they’ve once again mispriced the odds of a September rate hike, and the hawkish outlook evaporates.

    Upcoming events

    Today’s significant economic data releases include the Swiss KOF Economic Barometer, Spanish Flash CPI, Italian Retail Sales, UK Net Lending, UK M4 Money supply and UK Mortgage approvals. From the US we have the S&P/Case Shiller house Price Index and Consumer Confidence.

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