Times Are Changing

  • Market can't hide forever
  • Shifting dynamics force Fed rethink
  • Fed focusing on the positives
  • Stocks exposed into year end
  • Record low emerging market FX
  • New trades on the horizon

INEVITABLE - It isn't pretty out there right now. Clearly there is a sense the inevitable is finally upon us. The market has enjoyed many years of a delayed inevitable and it seems there is nowhere left to hide. What has been the big turning point these past days? In my view, the turning point has come from the inability for stocks to rally on news that has otherwise been supportive these past several years. The most recent more dovish than expected FOMC policy decision is the perfect example. Heading into the September event risk, there were two major camps. One camp was looking for a rate hold accompanied by hawkish language, while another camp was looking for a rate hike accompanied by dovish language. Instead, the Fed surprised and came out with a rate hold and dovish language. This should have been a recipe for stock market strength on the Fed leaving rates lower for longer logic, and yet, the market couldn't hold onto gains and sold off.

DIFFERENT APPROACH - So this was the big turning point. The market finally decided that even dovish Fed decisions weren't going to be enough any more, with the Fed having very little left in the tank in terms of additional accommodative tools. Interestingly enough, now that the Fed sees its dovish slant is no longer doing anything to help, even hurting investor sentiment, it has gone the other way in recent days, with Yellen last week focusing less on global risk and more on the recovery in the US economy and readiness for higher rates. I think the idea here was the market needed to feel good about itself. And while higher rates may make the market nervous, the fact that the Fed is raising rates because of the positives in the US economy and because it believes the market can handle it, is something that over the medium-term, could be more supportive of sentiment.

Clearly there is a sense the inevitable is finally upon us. Via @joelkruger

NATURAL FORCES - But again, it's important to understand that whatever course the Fed takes now, there is very little it will be able to do to keep the equity market from undergoing a long overdue, healthy correction off record highs. Going forward, expect more weakness in stocks into the end of the year and by extension, look for currencies like the US Dollar, Yen, Franc, and even Euro to an extent, to benefit from these flows. Emerging market FX is still looking vulnerable, with currencies like the Rand, Lira and Real at record lows. As far as the trading goes, the current backdrop is highly favorable for attractive set-ups. While there isn't anything out there just yet, make sure to stand by as I suspect all of this volatility will translate into new trades sooner than later. Very exciting!

It Hasn't Even Started

I'm looking for quite a bit of USD weakness in the months ahead and right now...


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