The Fed appears to have managed expectations perfectly and delivered a rate hike which is so benign that forex markets are still trying to figure out whether they buy or sell the US dollar, while on stock markets traders see nothing to fear and are buying.
The increase in risk appetite has helped the Aussie dollar outperform little as well and it is the only major currency to be making headway against the US dollar in the post-Fed-hike environment. That’s interesting and traders, particularly the bulls, will take note.
On commodity markets oil is crushed again, iron ore futures have had a lift, copper has risen back to $2.07.
So, the scoreboard (7.29am):
- Dow: 17,745, +220.87 (+1.26%)
- S&P 500: 2,064, +21.41 (+1.06%)
- SPI200 Futures: 5060, +37 (0.7%)
- AUDUSD: 0.7213 +0.0020 (+0.2%)
And now the top stories:
1. The Fed. There is almost nothing else traders in dealing rooms across the world will be talking about this morning. The word “gradual” seem to have soothed traders fears of an aggressive rate hiking cycle but the Fed’s dot plot is still saying 4 rate hikes in 2016. The market is only pricing two hikes. But working out the import of that divergence is something that traders will have to work out. Key here is the market is clearly saying it doesn’t believe the Fed’s interest rate trajectory. That’s helped Euro and Aussie rally a little and given stock traders nothing to fear. No reason for the Santa rally not to kick into a higher gear now.
Anyway enough of me. Here’s what you need to know about the Fed:
- The Fed just raised rates, ending 7 years of crisis-era monetary policy. Includes the full Statement.
- Here’s the new Fed dot plot. 4 hikes predicted in 2016.
- The Fed’s economic growth outlook. They still reckon inflation will return toward 2%.
2. Fed rate rises imply that Australian rates will eventually rise. Colgo, our editor in chief, built a great chart at the OECD website this morning of the long run relationship between US and Australian interest rates.
What’s clear is that even though the correlation is not what it was, China has weakened it, when the world’s biggest economy starts lifting rates its a sign our friends at the RBA might be thinking about moving too.
— Paul Colgan (@Colgo) December 16, 2015
3. China is cutting its growth forecasts. In what should be bullish for the China naysayers, researchers at China’s Central Bank, the PBOC, have slightly reduced their growth forecasts for 2016 to 6.8%. They see inflation picking up and real estate rebounding Bloomberg says this morning. They also cut their forecasts for 2015 from 7% to 6.9%.
I say bullish because what’s clear in this is not the forecast but the determination of the PBOC to keep growth as strong as possible. Bloomberg said “PBOC researchers forecast fixed-asset investment growth would pick up to 10.8 percent next year from the 10.3 percent increase they estimate for this year. The economists also said they expect exports to increase 3.1 percent next year, reversing the decline in 2015.”
4. China is working to kill 2016’s big grey swan. The Fed is important. But to me China is the big story of 2016: its currency weakness, its debt bomb and its economic growth rate. Central to this is the incredibly large pile of junk bonds that Chinese firms have issued. That’s a clear and present danger to global markets if it implodes.
But Bloomberg reports that “Chinese junk bonds are getting some help from the nation’s central bank, making them more resilient if not immune to the global swoon,” at the moment. Chinese yields on junk bonds have risen on 30 basis points against the 79 point rise in US junk bonds.
It’s all down to the central government letting companies fail while protecting the financial system as a whole. It’s a high-wire act, but one the PBOC and government are focussed on.
Oh, and the FT says bargain hunters are back in the junk bond market.
5. Oil has crashed again. No matter how hard I try to get bullish on oil it just keeps crashing back to earth. Last night it fell 4% on the back of a massive built in US inventories of 4.8 million barrels when the market was looking for a fall of 1.8 million barrels of inventories. That has the front Nymex crude contract back under $36 a barrel.
This is important because one of the things that the Fed, and other central bankers around the world, keep saying is that lowflation is “transitory”. The Fed said it again today. But in the press conference a journalist asked Janet Yellen how inflation could be transitory when crude has fallen so far. She said she’s been surprised. Perhaps this is a reason the market is not booking the 4 hikes the Fed governors have in mind.
Brazil cut to junk. Okay, so you may wonder why I’ve included this one. But the key here is one of the recurrent themes you see in the outlooks for 2016 from investment banks and research houses is concern about emerging markets. So Brazil’s downgrade by Fitch overnight to junk bond status, BB+ with negative outlook, is worth noting.
As the B in BRICS, Brazil is a big deal in the global emerging economies and markets and it could trigger even more selling and instability across this sector. You can read more at the Wall Street Journal.