The world is shifting on its axis. The markets are realising, after almost 10 years of constant focus upon them, that they’re being thrown to the wolves. Left to fend for themselves. Worse, in the case of Trump, forced to say “how high” when he says “jump”.
But we’re not there yet. Old habits die hard.
Consequently, after Janet Yellen pops up with some hawkish comments, the US Dollar and US yields rally. With the ECB meeting today, that lures back in the EUR/USD sellers, keen to practise some of that monetary policy divergence mojo that proved so magical for the past few years. Janet said:
‘As of last month, I and most of my colleagues – the other members of the Fed board in Washington and the presidents of the 12 regional Federal Reserve banks – were expecting to increase our federal funds rate target a few times a year until, by the end of 2019, it is close to our estimate of its longer-run neutral rate of 3%’
For those who still expect perma-dove Yellen to side towards the lower end of the dots, this was a little hawkish shot in the arm. That’s a few hikes a year, for the next 2 years! Woo hoo! So much, so buy Dollars. And indeed, Blondemoney would have thought the same, were these comments delivered a few months back. But that was before monetary policy died.
The trouble with that end-of-2019 vision is that Yellen herself could be gone in a year’s time when her term expires. Indeed, as soon as President Trump is inaugurated, there are 2 already vacant spots on the Federal Reserve for him to fill. Furthermore, these lovely 3 hikes a year are forecast before taking into account any Trumpian changes to the outlook for the US economy. Note Yellen starts that comment with the proviso “as of last month…”. It could all be very difference in just 2 days time.
With this in mind, we should expect the market to run from one side of the boat to the other. On the one hand, Trump might not want a strong dollar any more… with the other, let’s get back to the reassuring world of “Fed hikes vs ECB perma-QE”. As we shift from the old reality to the new one, expect decent volatility.
Then, we must ask ourselves, why is one of the biggest short positions out there the one that is selling the VIX?? [This chart courtesy of a loyal BM reader in Brazil]:
Yes just behind being uber short of the US 10yr, there’s being short the VIX.
Absolutely nothing at all on the horizon that might see stock markets, already at record highs, suffer a bit of a wobble?
Nothing at all?