Post-Fed disappointment will linger, and linger
Deep disappointment lingers in the last full session before holidays for many market participants.
When “some” is too much
Similar fractals are etched into all major European and North American indices. Despite upticks that push some gauges into the green as I write, charts show markets still floundering after being sucker-punched by the still hawkish FOMC statement. The call for “some further gradual increases in the target range for the federal funds rate”, for instance, when rates traders had, implausibly, homed-in on just one 25 basis-point rise in 2019, equates to a setback that key benchmarks have yet to shrug off.
Fig. 1. Technical charts of March futures contracts – Left to right: S&P; Nasdaq; DAX; FTSE [20/12/2018 14:34:27]
Source: Refinitiv/City Index
With expiries for the last principal derivative contracts of the year falling tomorrow, Thursday is the market’s last chance for serious bids with adequate cover. This probably means investors will shy away from new positions of any note. Indeed, the default stance shifted to one where rallies tend to be ‘sold’ some time ago, after many markets slotted into the general definition of a correction. Dwindling liquidity should also moderately extend the drift of world shares lower till year end. And given lingering fault lines, it’s difficult to see why the beginning of 2019 should be much different.
The key difference between the risk asset retreat that resumed overnight and most seen before Q4 is the dollar’s role. The dollar’s haven qualities have been in view for most of the year. This buffer against broader volatility has helped DXY, for one proxy, retain almost 5% of 2018 gains from the more sure-footed months in the economy. The trade-weighted greenback is up even more, rising 8%-10% depending on the measure. So, Thursday’s dollar dip is a striking signal after the Fed reiterated a view of the economy as “strong” (deploying the word four times). Yield curve reaction is a partial explanation. The term spread flattened to just 10 basis points away from flat earlier, near its 11-year low earlier in December. The traditional signal that a recession is on the way and DXY’s continuing penance for a 1.4% scramble earlier this month may not suppress the dollar for long though.
Brexit, trade still challenge FX
Thursday’s reflexive bounce across major FX made for some incongruous moves. They were fading at last check though sterling against the dollar and euro/dollar were still up by decent chunks just past U.S. open. Yet the ECB is set to be hamstrung till after next summer. And the main news from The BoE’s last 2018 statement, earlier—that “Brexit uncertainties [are] intensifying"—means it will be even less inclined to hike unless forced by out-of-control inflation. More broadly, as worries about trade repercussions weigh on policy in Asia and beyond, dollar differentials are widening, not contracting. So, the greenback should still trade on the rising side against majors in months ahead. As we’ve seen, this is a more urgent concern outside of the U.S. That calls the 2019 reversion thesis, for stock markets nursing the deepest 2018 falls, like China, into question.
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