The start of the Fed's most eagerly awaited two-day policy meeting in years has finally arrived with the market expecting Yellen to announce the first 25 bps rate hike in 9 years tomorrow with nearly 80% probability, and so far US equity futures are enjoying a last minute relief rally, while emerging market stocks rose for the first day in ten after the longest losing run since June. Europe's Stoxx 600 Index has also rebounded from a five-day losing streak, the worst in over four months.
While yesterday stocks started off weak on the latest commodity carnage only to rebound following some truly ridiculous action, so far today's session has been a mirror image, with oil rebounding from February 2009 lows and WTI printing above $37 at last check, even as China closed just off its lows, the Nikkei tumbled led by a strong Yen, and the broader commodity complex once again sliding as can be seen in the Bloomberg Commodity Index, which tracks 22 materials, and which just dropped to the lowest since March 1999 despite the modest oil rebound which briefly took WTI above $37 but has failed to sustain the highs.
If yesterday was any indication, it would not be at all surprising to see today's early strength be wiped out and the S&P closes at its lows as the reality of an $800 reduction in overall liquidity finally hits market participants.
Somewhat surprisingly the dollar has fallen against most of its major 16 peers. Bloomberg believes that investors have had time to adjust to the prospect of higher U.S. interest rates since Oct. 28, when the Fed signaled a December move was likely. We are less sanguine about just what is priced in especially since all other central banks will continue to aggressively easy and devalue their own currencies, most notable case in point of course being China.
And while there is a long way to go before the week ends, including not only the Fed's first potential tightening in nearly a decade, but also the largest S&P option expiration on Friday in many years (as profiled before), which in this illiquid market means a lot of volatility is imminent, but for now here is where we stand:
A closer look at the markets, shows that Asian stocks saw choppy price action following the positive close on Wall St. as energy prices rebounded, while prospects of a looming Fed rate hike kept sentiment cautious. ASX 200 (-0.4%) initially traded with minor gains with the energy sector underpinned by the recovery in crude, while healthcare outperformed after Greencross shares soared 30% on buying interest for a 15% stake in Co. However, the index then shrugged-off gains to print a fresh 2-year low. Elsewhere, Chinese markets traded mixed before both the Hang Seng (-0.2%) and Shanghai Composite (-0.3%) closed in the red, while Nikkei 225 (-1.7%) underperformed despite JPY weakness with investors cautious ahead of the FOMC meeting. Finally 10yr JGBs traded higher as Japanese equities lag.
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