VIX back to the 15 range ahead of a consequential Fed meeting, deep into the economic cycle. Volatility crush continues into actual central bank announcements. Zombie US markets can’t go down but can’t rally either. After recent, underwhelming ECB announcements, markets sense more to come from the Fed, yet a gasping sense reigns omnipresent. What, actually, can the Fed do? After a litany of hawkish babble, commentary, from Fed governors this month, indicating the potential for two rate hikes. Can the expectation fall all the way to zero hikes in 2016? Just on an employment report that missed by 20,000 jobs? It seems that getting expectations down to no hikes in 2016 is the only way to deliver a “dovish surprise”. In this context, market action will be difficult to predict at 2:00 EST.
It’s possible that this morning’s Bank of Japan action steals the day. BOJ introduced a policy shift, towards targeting the yield curve. Benchmark rates are held at negative 0.1%, with 80 trillion yen in asset purchases maintained, with expressed intent to target the yield curve. Negative short-term rates, and positive longer-term rates, create a steeper yield curve, to aid Japanese bank profitability, where profits had been squeezed by policy. First equity move post-announcement: Nikkei +1.9%.
Tough to see Fed trumping the BOJ.
- Bond markets feel ready to go (lower) without meaningful, explicit, lower-for-longer, support
- Gold feels tired
- Equity markets floundering, in a false calm, amidst high valuations, and ready to break hearts if the bond market throws a fit (tantrum)
- LIBOR not quite right
- Cognitive dissonance amongst oil/energy markets
A time for markets to be big in Japan…
Crystal bits of snowflakes
All around my head and in the wind
I had no illusions
That I’d ever find a glimpse
Of summer’s heat waves in your eyes
You did what you did to me
Now it’s history, I see
Here’s my comeback on the road again
Things will happen while they can
I will wait here for my man tonight
It’s easy when you’re big in Japan
Aah when you’re big in Japan-tonight
Big in Japan-be-tight
Big in Japan ooh the eastern sea’s so blue
Big in Japan-alright
Pay! – Then I’ll sleep by your side
Things are easy when you’re big in Japan
Oh when you’re big in Japan
Neon on my naked skin, passing silhouettes
Of strange illuminated mannequins
Shall I stay here at the zoo
Or should I go and change my point of view
For other ugly scenes
We’ll see at 2:00 pm.
Key off the US 10-year, and the USD, for any hint at an enduring US equity market move. No matter what the Fed does, if it isn’t enough to drive 10-year yields back towards 1.60%, and USD weaker, don’t expect any rally to stick.