In his morning note, SocGen’s currency guru Kit Juckes has a very interesting observation regarding the latest minutes from the Fed and the ensuing market action.Remember, markets sold off and the dollar rallied yesterday on a few vague hints that the Fed’s appetite for more easing may be coming to an end.
Juckes predicts that by the end of the year the whole “risk-on/risk-off” market behaviour (where everything behaves in unison across asset classes) will die.
The ‘risk-on/risk-off’ regime is based on the premise that good economic data in the US are bad for the dollar because the Fed is on hold for ever and US yields are so low that yield-hungry investors are squeezed out of US markets and into foreign currencies. If the traditional relationship between US yields and economic data is restored, the ‘risk-on/risk-off’ regime will come to an end (not before time), and stronger US data will be dollar supportive. This is going to happen at some point this year, and the overnight move is a taste of how it plays out. Only a taste however, as the FOMC is still too split and a change in Fed direction is still a long way away.
This has the potential to be a year in which markets behave very differently than they have.
Other analysts have suggested some kind of “end of macro,” whereby thanks to a normalized environment, stock selection comes back into vogue, and it’s not about just timing whether the indices will go up or down.