Fed testimony capitulates global markets

Nerves were highly strung since the start of the year, with no apparent signs of relief. They were tightened once more in the overnight markets as European and US equities tumbled.

Source: Bloomberg

Clearly, Yellen’s semi-annual testimony served up more uncertainty instead of clarity, even if that was not her intention. She’s just trying to be careful in terms of communicating policy moves, stressing that policy direction is not pre-set. The irony is that more communications do not translate to better understanding. It is a clear message that wields great influence. And it is clear (no pun intended) that Yellen’s comments are not providing the certainty which market players wanted.

Furthermore, she muddied the waters yesterday by disclosing that the Federal Reserve was considering introducing negative interest rates as a policy option if the US economy stumbles. The market is increasingly disillusioned with the prospects of more rate hikes in 2016, where the implied probability according to Fed funds future prices shrank considerably to 11% from 30% in the previous day. In fact, some traders are pricing in odds of a rate cut! At some point, the huge gulf between Fed projections (still 4 hikes) and market expectations (one or none) has to narrow. For the moment, it seems that the Fed has to concede some ground by paring back their projections. Investors would look for this in the March FOMC meeting.

Market participants are naturally concerned whether the selloff across global equities will go on. I feel a significant factor hinges on how China reacts to the global market capitulation when onshore centres resume trade next week, after the week-long Lunar New Year celebrations. Needless to say, sharp declines in Chinese equities could trigger another bout of global rout, in a vicious feedback loop. Asia is set for a challenging session today, with Japan already facing more downside pressure upon returning from a holiday.



  • US indices were smacked lower, with S&P 500 and the Dow tumbling over 1%. European shares fared worse. Stoxx European 600 slumped -3.7%, dragging by banking stocks. Banks have been hit the hardest this year, plunging some 29% year-to-date, weighed by disappointing earnings reports, bad debt woes and concerns of creditworthiness. Yesterday, Societe Generale dived 13% after announcing missed quarterly profits.
  • Oil took another hit yesterday, on signs of increasing US crude stockpiles. WTI crude fell -4.5% to a new 12-year low at $26.05. However, to push substantially lower, we need a stronger impulse, as much of the bad news around oil should already be priced in.
  • One of the few assets to benefit from global risk-off is gold, where easing rate hike expectations and increase in physical demand have given the precious metal a leg up. Now that gold prices are firmly above key $1200 level, reaching a one-year high, there could be more upside potential, should risk aversion takes another notch higher, and even higher market expectations of a no rate hike move this year.
  • STI is bucking regional stock slide in early Asia, as the strong technical support at 2540-2550 continues to stave off bears. Should this support give way, the immediate support to watch would be Oct 2011 lows of 2521.95.

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