After a period of silence and a somewhat lacklustre summer/market intertwined with sporadic volatility on the back of rhetoric from Trump, the scandals/revolving door scourge of the white house and North Korea’s testing of ballistic missiles, there is finally something to take note of that is of economic significance.
FED unwinding balance sheet
On 20 September 2017, the FED announced its commitment to reduce the size of its US$4.5-trillion balance sheet in October, starting with US$10 billion a month.
Janet Yellen says that she is lost as to why inflation is low, but there will be one more increase in rates before the end of the year.
Meanwhile, the FED appears to be stable despite Stanley Fisher’s resignation in mid-October, and the Cohen threat on Yellen has cooled down at least till the next hiatus from Trump.
Trump’s bullying tactics have taken a reversal especially towards Mueller and North Korea’s Kim Jong Un. The U.S. interest rates are set to rise and the question of what price risk definitely comes into play?
The first stop would be the U.S. dollar, which should rally, and this could be a start, especially for the EUR/USD and AUD/USD, which are both sitting on their five-month support trend lines.
Throw in the New Zealand elections this Saturday, if Labor comes into power then expect the knock-on effect on the ASX and the Aussie dollar.
Needless to say, the Kiwi USD would take a battering as well. In the short-term, the market is long the higher yields and either way there would be a sell-down in the Kiwi dollar, the key is by how much depending on the election outcome.
German Federation election
Europe seems to be growing very strongly and no surprises are expected with the German Federal election. Some verbal fencing taking place between Boris (who desperately needs a hair cut or a set of wigs) and May.
Surprisingly the EUR/GBP pulled back and the TG/USD has rallied, forcing some analysts to reassess the forecast. It will not, however, be the last time they rejig their forecasts either.
Credit default swaps and currencies
S&P500 made a new high recently, and taking data from SPY, Apple represents about 13% of the index.
With analysts and consumer feedback saying the new iPhone 8 and iPhone X are too expensive and the iWatch 3 is not necessary, it is the first set of negative news/sentiment of late on the company.
How it plays out will depend on delivery and sales, pre and the run-up to Christmas post-Thanksgiving. But as we go into a higher interest rate environment, how will the banks fare given they are extremely leveraged with their high loan-to-deposit ratios?
Will we see an increased shift away from equity to short-term money market instruments?
We believe the interest differentials will be reflected in the credit default swaps and currency markets first, before reaching the broader equity market.
As always different horses for different courses, but October is the month where the grim reaper usually waits!
Disclaimer: This is NOT a recommendation or encouragement to buy or sell any securities mentioned. This is purely my opinion and it could be fraught with errors and misdiagnosis. Proceed at your own risk.