Slow leads today, macro moves tomorrow

There remains little in the way of meaningful data or macro news that would give markets a leg higher, or even lower in the case of the S&P. 

Source: Bloomberg

Apple’s product launch was met with more enthusiasm than pessimism overnight, and drove the NASDAQ higher (which is not hard considering it makes up almost 25% of the index). It dragged the broader US markets with it, but there was no conviction in trade in Europe, nor was there any other corporate news of merit.

The trading activity across the globe leads me to reiterate what I have been calling since June; volatility is coming and what is likely to spark the VIX is happening next Thursday with the September meeting of the Fed.

The next two FOMC meetings will be watched with increasing interest and they will (in my opinion) be the events that the market is looking for to confirm if it will leg up or down.

Trading in the USD is a key indicator to my long VIX call. Expectations are building for a shift in tone from the FOMC, and most will skim read the press release to the final paragraph to see if the two words that have generated so much interpretation over the past six months are still in play - “considerable time”. We are now primed for two events: the rise of the USD and the rise of market volatility.

The reason for this call is that if the language remains, it will only stoke more speculation about the state of affairs in the US economy and whether or not the Fed remains behind the curve. It will increase talk around inflation risk, talk about sharp reactions if overheating eventuates and talk around whether the metrics in the employment data are becoming obsolete.

The asset purchase programme is no longer a market mover, and there are no signs that the current unwind will be altered, making October the final month of transactions before it is completely removed. What will move currencies, bonds, equities and the like is the language; anything that can be interpreted as hawkish is going to drive sentiment.

If the board does remove ‘considerable time’, what does that do to the timeline to rate hikes? Fed Chairperson Janet Yellen has had her Freudian-slip moment at her first ever meeting when she clarified that considerable time is approximately six months. However I would expect ambiguous language to be use rather than specific time suggestion.

RBA Governor Glenn Stevens put it perfectly when he answered a similar question posed above for the RBA’s use of  ‘period of stability’. ‘I’m not going to replace it with a ‘period of instability’… [But] before it boxes us in I'd like to replace it with something much more vague, like "policy remains appropriate". This sums up perfectly what is likely to happen with the Fed next week and why I remain tactically long volatility, and why the USD is the vehicle to watch; rate hikes are coming (just when is unknown).

Ahead of the Australian open

We’re currently calling the ASX 200 up 16 points to 5590 and we should see the market snap back slightly. However, in the past six days the ASX has lost over 100 points in the intraday moves and this is still a real possibility with iron ore remaining on the front page, falling to US$82.2 a tonne, which is a  fresh six-year low.

I am also mindful of the employment read, which is forecasted to see 12,000 jobs added, with the unemployment rate expected to fall to 6.3%. However, activity in August was fairly benign and the prospect of the employment numbers underperforming is heightened.

China also sees the release of its CPI numbers; after having seen mixed consumer data from the country over the past month, inflation may actually ease slightly. Both will impact the AUD and considering its march lower, signs of weakness in both read could see the small rally during the US session evaporating.

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