On the upcoming FOMC Funds Rate decision

Equity Indices

Equity indices week of May 27.PNG

  • ASX 200 gained 1.38% for the week, sitting 67% above 52w lows;
  • Nikkei 225 gained 1.71% for the week, sitting 34% above 52w lows;
  • CSI 300 dropped 0.51% for the week, sitting 8% above 52w lows;
  • HSI gained 3.65% for the week, sitting 24% above 52w lows and stands at a 16% premium to the CSI 300:
  • FTSE 100 gained 1.86% for the week, sitting 55% above 52w lows;
  • TSX gained 2.08% for the week, sitting 68% above 52w lows; and
  • S&P 500 gained 2.28% for the week, sitting 90% above 52w lows.

Now, the chart of HSI vs. S&P 500 are worrying for their respective reasons:

HSI YTD.PNG

The HSI could drop back below the 20,000 mark as the 50D is heading towards a 100D cross, while the S&P 500’s 50D is sitting comfortably above both the 100D and 200D moving averages:

S&P 500 YTD.PNG

FICC

  • Fixed Income: headline 10-year risk free rates continue to sit at all-time lows ahead of the FOMC announcement in two weeks:
    1. US 10-year: 1.85%
    2. CAD 10-year: 1.35%
    3. GBP 10-year: 1.44%
    4. GER 10-year: 0.14%
  • Commodities: a mixed sentiment last week:
    1. WTI: $49.49/barrel – gaining 2.23% for the week;
    2. Brent: $49.39/barrel – gaining 1.23% for the week;
    3. Gold: $1,212.38/oz – dropping -3.16% for the week;
    4. Silver: $16.23/oz – dropping -1.83% for the week; and
    5. Copper: $211.40/lb – gaining 2.85% for the week.
  • Currencies:
    1. Yuan appreciated 25 basis points to 6.5655/$ with a 26 basis point spread lower than the offshore Yuan;
    2. Yen appreciated 15 basis points to 110.31/$
    3. Canadian Dollar appreciated 70 basis points to 0.7680/$
    4. Aussie Dollar depreciated 55 basis points to 0.7182/$

Gold Company Rally

XAU Gold.PNG

Gold prices have come down a long way from their all-time high of $1,900.02/oz, sitting at just $1,212.38/oz as of Friday – a 57% drop from $1,900/oz.

However, we have seen Gold producer stock prices double within 2016:

Kinross Gold Corp has risen 120% YTDK CT Equity (Kinross Gold Corp) 2016-05-30 11-22-19

Barrick Gold Corp has risen 112% YTD
ABX CT Equity (Barrick Gold Corp 2016-05-30 11-20-02

Anglo Ashanti (88% YTD), Newmont (78%), Agnico Eagle (68% YTD), Newcrest (44%), Goldcorp (35%)

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Upcoming Funds Rate Decision

We are moving into an era where half of the headline central banks operate with negative interest rate policies, such that their economic policy are geared towards pushing citizens into consumption – since placing your money in the bank yields a negative return against inflation – and away from savings.

THE FOMC Dot Plot

Fed Dot Plot.PNG

While the Bank of Japan and European Central Bank remain in NIRP, it appears the Fed is turning the other cheek as overnight interest rates are set to rise towards the Fed target of 2%. Fed Chairman, Janet Yellen, reiterated at Harvard last Friday a message not too distant from those shared by her colleagues during the most recent FOMC meeting minutes,

It is appropriate for the Fed to gradually and continuously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate.

The Federal Reserve could not keep interest rates at just above the zero lower bound for eternity – the only direction was up or down. I hope that 2015 will be a year we look back on which saw bond traders and hedge fund syndicates drive the media cycle in lobbying the Federal Reserve not to raise interest rates – hedge funds and other speculators have accumulated the largest short position in maturity of the US 2-year notes since 2014, according to the CFTC.

Now that Janet Yellen can keep inline her respective Fed city Presidents, the pace of Funds Rate normalization will become the key rhetoric to markets; however, not without two concerns.

  1. Yellen is concerned that, if we (the Fed) were to trigger a downturn or to contribute to a downturn, we would have limited scope for responding, This points to the limited conventional and unconventional monetary policy the Fed has left to deal with, and given the size of the Fed’s balance sheet, another round of “QE” is simply unrealistic.
  2. Since the pace of Funds Rate hike will become the key market rhetoric, which FOMC meeting dates are the likely candidates for change? The upcoming June meeting is unlikely as Funds Rate traders price at a 30% chance of a 25 basis point hike, and similarly the November meeting is unlikely given US elections. This leaves July 27th (priced at above a 50% chance), September 21st and December 14th as the likely candidates.

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