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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 Counterparties:

MORNING BID – Just our imagination

Something has changed in the bond market in some ways - but it's a bit difficult to tease out when you're talking about yields still near very low levels. But there's a sense that the San Francisco Fed's paper on the way in which economists are underestimating the Fed's own view of interest rates is a game-changer, or maybe it's just that people are waking up to the idea that the Fed really does have to raise rates eventually, or even more so, that it's an overreaction to a previous overreaction: backlash to the idea that the August jobs report was so lousy that the Fed was still firmly in "not doing anything ever" mode.

The dynamics of the long-dated market haven’t been altered all that much just yet – or rather, it’s a bit early to declare that. The 10-year is still hovering around 2.50 percent, and the spread between that and 10-year Treasury Inflation Protected Securities stands at about 2.11 percent, and it’s remained in a steady range for the last year-plus as well, actually trending lower in the last few months.

from MacroScope:

An almighty gamble

Britain's Prime Minister David Cameron leaves Downing Street in London

Having woken up to the very real possibility of Scotland going it alone, the leaders of Britain’s main parties have scrapped their parliamentary business and headed north to campaign in what amounts to a huge gamble.

The “No” campaign has been criticized for many things – being too negative (though no is negative by definition), being too aloof, failing to address the hole’s in Alex Salmond’s manifesto. The question is whether it is too late to do anything about it. It is risky to deploy Prime Minister David Cameron who, by his own admission, is not catnip to the Scots.

from Counterparties:

MORNING BID – Sound as a pound

Global ructions are dominating asset flows right now, and we’re not even talking about violent events such as the ongoing Russia-Ukraine conflict, the rise of Islamic State in Iraq and Syria, or the Israel-Palestine situation. Right now smaller events – yet uncertain ones – seem to be affecting the larger markets a bit more, contributing to a decided shift in factors that U.S. assets are reacting to.

The bond market is no longer just about a steady belief in lower-for-forever activity from the Federal Reserve, but about the expectation for more flows from overseas as U.S. assets look more attractive and the U.S. dollar continues to strengthen. The dollar had a banner session against the pound with the threat of Scottish independence growing more and more possible (cue everyone yelling “Freedom!” while being drawn and quartered), as the messy considerations surrounding what happens to oil revenue and the diminution of the U.K. economy is considered. It also threatens to drive more flows toward the dollar as the Bank of England might be expected to hold off on raising interest rates when they had been expected to be the first central bank to act.

from MacroScope:

Too close to call

Cakes are seen at a tea-party organised by members of the group 'English Scots for YES' near Berwick-upon-Tweed on the border between England and Scotland

A second opinion poll in three days has put the Scottish independence vote as too close to call.

TNS gave the “No” vote 39 percent  support and “Yes” 38. Its last poll in late July gave the “No” campaign a 13-point lead. Taking only those who are certain to vote, the two camps are tied at 41 percent.

from MacroScope:

What’s it all about, Mario?

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It’s ECB day and after Mario Draghi’s recent dramatic utterances, expectation for fresh action has grown, expectations which are likely largely to be dashed.

Draghi told the world’s central banking elite in Jackson Hole last month that market inflation expectations were falling markedly and the European Central Bank would use everything in its power to stabilize them in order to avoid a deflationary spiral. He also ripped up central banking orthodoxy by calling for more fiscal spending by governments at the same time as redoubling economic reform efforts. How to read that?

from MacroScope:

Over to Obama

U.S. President Barack Obama walks towards Air Force One before departing for Estonia while at Andrews Air Force Base outside Washington

Barack Obama is in Estonia before the NATO summit in Wales intending to pressure Vladimir Putin to back off in Ukraine. The rhetoric will be strong – not least about protecting the Baltics under NATO’s umbrella.

But with zero chance of western military action in Ukraine the hope is that economic pain via sanctions will bring Moscow to heel. Existing sanctions are clearly hurting the economy – the rouble has plumbed record lows as capital flees or shuns the country – but that hasn’t stopped Putin so far.

from Breakingviews:

S&P 500 at 2,000 invites “new normal” thinking

By Martin Hutchinson

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

Beware new paradigms. The S&P 500 Index’s first trades above 2,000 on Monday invite the idea of a new normal in markets. The price-to-earnings ratio is under 20, only moderately above average, and interest rates remain low. But U.S. earnings are at a peak relative to GDP. Assume they adjust back to the long-term norm, and the stock benchmark would be a third lower.

from MacroScope:

UK rate consensus nearly rock-solid even as markets flip-flop over timing

BFor all of the flip-flopping in sterling markets in recent months over when the Bank of England will finally lift interest rates off their lowest floor in more than 300 years, the consensus view among forecasters has been remarkably stable.

Not only that, but surprise news that two of the nine members of the Monetary Policy Committee voted this month to hike Bank Rate by 25 basis points to 0.75 percent does not seem to have shaken the view that it will be early next year before rates go up.

from Global Investing:

Betting on (expensive and over-owned) Indian equities

How much juice is left in the Indian equity story? Mumbai's share index has raced to successive record highs and has gained 24 percent so far this year in dollar terms as investors have bought into Prime Minister Narendra Modi's reform promises.

Foreign investors have led the charge through this year, pouring billions of dollars into the market. Now locals are also joining the party - Indian retail investors who steered clear of the bourse for three years are trickling back in - they have been net investors for 3 months running and last month they purchased Rs 108 billion worth of shares, Citi analysts note. 

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