Traders positioning for FOMC

Investors’ mood improved during the overnight session, with equity markets in Europe and US closing up. 

US Traders
Source: Bloomberg

Developed market bonds were also sold off, as the VIX index dropped to 22.5%. Although many attributed the US retail data to be the trigger for the rally, I suspect the better sentiment is more likely a result of pre-FOMC positioning moves.

US retail sales expanded less than expected in August at +0.2% m/m (Est: +0.3), with sales excluding auto and gas slightly higher at +0.3% but still below market estimate of +0.4%. However, the upward revision to July’s reading, and a broader growth in the August numbers made the overall report a positive one. Other data were less optimistic.

The Empire manufacturing survey for September was considerably lower than expected, coming in at -14.67, where the market is looking for more improvement to -0.5. In addition, industrial production fell into contraction at -0.4% m/m, after a strong, upwardly revised July reading (from +0.6% to +0.9%).

Taken today, US data is not exactly supportive for the case of a rate hike this week, but the market seemingly is positioning for one. Futures indicated a higher implied probability of a rate move this Thursday, where the market is pricing in a higher 32%, from 26% last Thursday. The US dollar advanced 0.4% against a basket of major currencies.

Nonetheless, the relatively modest moves in the financial markets suggest that traders are still cautious about their FOMC bets. The dollar index (DXY) surged over 5% in the first half of March, prior to the March meeting, with high hopes of a rate move. In June, the DXY dropped over 2% in the first two weeks of the month on fleeting expectations that the Fed will raise rates. Comparatively, the DXY eased 0.6% in the first fortnight of September.

Perhaps traders are getting better at managing their emotions, and position more carefully ahead of the FOMC decision this Thursday (early Friday morning for Asia Pacific markets). Or maybe the Fed has improved its communication in terms of providing sufficient information and tempering exuberance.

Looking towards Asia, the improved risk appetite should provide some lift to the regional equities. Chinese markets may however remain an enigma and do its own thing. In news, Bloomberg reported that the Chinese police are investigating the president of Citic Securities for insider trading.

Xinhua reported last month that four executives from China’s largest brokerage admitted to allegations of insider trading. It is difficult to say how the probe will affect the onshore stock market, i.e. whether the recent slide may be arrested. The Shanghai Composite Index is trading at key 3000 level, and market participants will watch this level keenly.

 

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