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from Counterparties:

MORNING BID — Breaking it down, Fed style

It's all over but the dissection of the Fed statement, due later today, which will follow with a Janet Yellen press conference after the U.S. markets get word of whether the Fed did or did not eliminate the "considerable time" bit from its statement that saw markets go into a tizzy all of Tuesday. At this point the market believes that phrase now may *not* be eliminated, which marks the second reversal in about a week on this point. No matter what, somebody is going to be caught leaning in the wrong direction, but if the latest intelligence is that the Fed's statement won't change materially until the October meeting, then the freshest bets are probably in the direction of those betting on that much. So if the statement does cut out that language or modifies it in any way, you could see a selloff in equities, the dollar and bonds.

The meeting also brings with it the update on the Fed's "central tendencies," that is, its sure-to-be-incorrect projections on where the economy is going. Given the rebound in the second quarter that seems to have at least been somewhat sustained in the third quarter, it wouldn't be surprising to see the Fed outlook for GDP bumped up for 2014 (currently 2.1 to 2.3 pct) and 2015 (at 3.0 to 3.2 pct - the Fed will predict 3 percent growth for the year-out period until we're all Morlocks), and the unemployment rate expectations are projected to drop to maybe 5.7 to 5.8 percent from the current 6 to 6.1 percent expected at year-end. Which is all well and good, but it doesn't give us a good sense, really, of what's to happen going past the meeting.

What we may be looking for over a longer time frame is an elevation in volatility. Richard Leong, in a story last week, pointed out that the market is starting to see more options-related buying that suggest rising rates in the federal funds and eurodollar markets. In a Tuesday story he noted that various measures of volatility - including the Merrill Lynch MOVE Index, a measure of fixed-income volatility, is at levels not seen since mid-summer. The dollar is showing similar activity, with volatility in the currency markets finally picking up after being stagnant (ok, about as exciting as watching grass grow) for a good long period of months now. Nomura strategists are anticipating a further pickup in volatility post-Fed meeting among currencies, judging by options positioning.

The equity market isn't quite there yet - the VIX still remains low, trading below 13, but volatility would be expected to pick up in other risk markets if the interest-rate arena begins to exhibit more gyrations. That's because the moves in that market make it more difficult to fund carry trades to buy other assets - the dollar remains a cheap source of funds right now, but the cost of carrying such bets increases as rates rise and more importantly as the market gets more volatile. Where that leaves investors is unclear - Bank of America/Merrill Lynch notes that credit investors are going with shorter durations (which adjust more quickly as rates rise) and leveraged loans as the best choices over the next 12 months, and are a bit less sunny on high yield, which has the potential for some ups and downs in coming months.

from Breakingviews:

Sterling fall shows rational alarm over Scotland

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The market is not too negative about the pound. The fall of sterling – down 6 percent against the dollar since July 15 and by 2 percent from Friday morning to Monday morning – is less a panic than a rational response to the possibility that the United Kingdom will be divided in two.

from Breakingviews:

Euro has further to fall

By Swaha Pattanaik

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Euro zone inflation is too low, and economic activity sluggish. But at least one thing is going the European Central Bank’s way. Its hankering for a weaker currency will be fully gratified.

from MacroScope:

Strong euro may be a monster Draghi can’t tame

Mario Draghi, President of the European Central Bank (ECB), addresses the media during his monthly news conference at the ECB headquarters in FrankfurtECB President Mario Draghi may have created a monster when he declared nearly two years ago that he will do “whatever it takes” to save the euro.

Given that Draghi has now openly pegged the outlook for monetary policy at least partly to the exchange rate, the prospect of both short-term and long-term investors buying the euro is a worrying obstacle for policy.

from Counterparties:

MORNING BID – Pitfalls and switchbacks

This week profiles as one that contains a bunch of potential minefields that could challenge the market's prevailing view on what's to happen with major market-moving events.

The ECB meeting is one of the more obvious ones, what with investors expecting for some time that the euro would push higher and higher on the expectation of an improved outlook in the economic situation there.

from Breakingviews:

Review: A world of reasons for the dollar to crash

By Martin Hutchinson

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

In “The Death of Money,” author James Rickards sees a world of reasons for the dollar to crash and the world monetary system to collapse. The greenback does indeed have dangerous adversaries, from China to al Qaeda. However, Rickards lets the Federal Reserve and budget deficits off too lightly as generators of trouble, and his solutions would cause yet more havoc.

from Counterparties:

MORNING BID – Janet Yellen’s rain (snow) check

This is the thing about delaying the new Fed chair's follow-up testimony by two weeks due to bad weather, you actually make the second hearing something that's potentially interesting. (It will depend, of course, on whether members of the Senate Committee ask provocative questions, and while you can lead a horse to water, well, you know.)

In the interim two weeks since Janet Yellen last appeared before Congress, the U.S. economic picture has gotten much more muddled. That's mostly because of poor retail sales and employment figures, and the out-of-control situation in Ukraine which has led to a regional flight of some assets. There's also been some interesting comments from the likes of Fed Governor Daniel Tarullo, who suggested the Fed should be paying more attention to the formation of asset bubbles and the use of monetary policy to curb them. That anyone is surprised at this shows how pervasive the "Fed put" option has become in the discussion of Fed activities, so we've really lowered expectations here.

from Breakingviews:

Whole FX business belongs in the dock

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

No one has yet been accused of a crime in the foreign exchange market, but there is a lot of talk of disturbing practices, including dealing in personal accounts against clients’ interests. This could be a scandal as big as the fixing of interbank lending rates. However, the probes seem unlikely to address the hardest questions about how the whole currency business works.

from Expert Zone:

Why the RBI raised interest rates

(Any opinions expressed here are those of the author and not of Thomson Reuters)

The Reserve Bank of India (RBI) raised interest rates at its review on Jan 28. The justification usually given for doing so is inflation.

But at its previous review, when inflation had soared, the RBI was passive and left rates unchanged. Now, with wholesale price inflation (WPI) slowing to 6.16 percent, the RBI was quick to raise the repo rate by 25 bps back to its highest level since the 2008 crisis. Why?

from Counterparties:

MORNING BID – Emerging Markets, Apple, Ma Bell, and whatever else one can think of

In the words of Inigo Montoya, let me explain. No, there is too much. Let me sum up.

The market's most immediate issues remain tied specifically to what's going on overseas, particularly in Turkey. There, monetary authorities are meeting on a potential interest rate hike as a way of getting on top of the inflation problem (inflation's at 7.5 percent, and the central bank's lending rate is, uh, 7.75 percent).

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