- Markets back to full trade post holidays
- Rally in risk assets starting to falter
- China import data distresses
- Fed should be moving towards liftoff
- Lower for longer no longer helpful
IT AIN'T PRETTY - So we are back to full trade today following the Monday Japan, US and Canada holidays. I expect things will heat up accordingly, particularly with the economic calendar quite stacked for the week and the market now needing to consider just how far it wants to take this latest risk rally. There is already evidence of the rally stalling out on Tuesday, with market jitters setting in early in the day and intensified on the concerning China import data, which poses systemic risk to the global economy. But again, I'm not too sure we needed this China news to get participants thinking twice about the equity rally and Dollar sell off. I can't stress enough how important it is to understand that we have seen a risk rally over the past several days because things are BAD! The market has been rallying on the expectation that a lower for longer policy reaction will once again come to the rescue and bolster sentiment.
TIME FOR CHANGE - Yet, in my very strong opinion, this strategy has already been well exhausted and though there may still be some lingering flows clinging to the hope that lower for longer will continue to stimulate, the reality has changed and this no longer can support the global economy as it once did. Whether the Fed moves this month, next month or in early 2016, it should be realizing the time has come to start to reign in this emergency policy, as it has very little left that it can do on the accommodative side. The Fed's primary mandate in this new world economy is managing sentiment and the best way to manage sentiment is to send a message the US economy can handle a liftoff, while still keeping policy super accommodative. The alternative is leaving rates where they are now and seeing a massive liquidation in risk assets that leaves the Fed with little room to do more. That would be ugly!
THE REAL ECONOMY - If the Fed moves ahead with liftoff, at least in this scenario, if risk assets sell-off, the market will feel comforted knowing that it is because things are good and because the Fed has set out on its long overdue path to policy normalization. As far as the real economy goes, if the Fed raises rates, money will still be super cheap, but just maybe, this will incentivize banks to lend a little more and take on a little more risk on that front. Monetary policy has stifled lending, creating a liquidity trap. Yes, money is cheap, but what good is that if it can't be accessed? Again, whichever way the Fed leans from here, the stock market should be exposed. With that said, the better course from here for both financial markets and the real economy, is the course of liftoff. On the strategy side, I am positioned short risk via AUDUSD. I will be looking for follow through over the coming days and will only consider exiting for a loss above 0.7400.