Yellen And The Three Bears

Vice Chair of the Board of Governors of the Federal Reserve System Janet Yellen

In a world that is now dominated with conspiracy theories and fake news, Yellen just the other day found herself as being a co-conspirator in the global central bank cause of orchestrating hiking rates whether they be necessary or unnecessary. That at least was the theory. The BoC raising rates the other day, the first time in seven years was seen by some as validating the theory. Far-fetched but you know.

Today markets were reviewing Yellen’s comments in her address and not unsurprisingly were seen as rather dovish. The Fed won’t hike rates unnecessarily and especially if inflation remains low and growth remains sluggish.

If the Fed were to hike rates that was seen as being somewhat bearish for EM’S. That view has now changed. EM investors are now investing again.

The third part of the story are tech stocks. Tech stocks should rise irrespective of what the level of interest rates are because they are unbounded growth stocks if they do what they are supposed to do.

So, in one fell comment, Yellen has assuaged the fears of many and it is safe for Goldilocks to come downstairs again and play.

Following on from Yellen the Big Bad Bear, aka Draghi speaks in about a month’s time and all market eyes and ears will be watching and listening carefully. The annual invitation only event for bankers, central bankers and economists kicks off on the 24-26 August that’s the Jackson Hole Conference. What is important this time is that in the closed conference Draghi will be addressing the audience. The last time he did this it was 2014 where he announced the beginning of QE. Some have proffered up that he may announce a winding back of the programme. Should this be the case it will be the first time for some years the two largest and most important Central Banks will be aligned. This could be big! Any slowdown in the purchasing of euro 10 bio per month will have an effect.

On a political note, it would appear that whilst Trump is travelling Mitch McConnell was to push the healthcare bill to make good on Trump’s promise. McConnell cannot afford to lose two GOP members as it appears unlikely the Democrats won’t support the bill. It is becoming increasingly likely that McConnell may in fact lose those two GOP members.

A further test could be brewing for Trump and test his policy on the environment. The proposed Rio Tinto Resolution Copper Mine in Arizona could test this policy. Environmentally it will test the local populations. The mine will use enough water to supply a city and leave a crater about 1 kilometre deep. Water is in short supply in Arizona and the issues surrounding heavy metals has yet to dealt with. Copper is a poison and any mining operations previously had to be careful.

Equities rallied today on the parsed Yellen comments. Financials were seen as a winner and rallied. Estimates have the financials second quarter earnings up 7%, the third best after technology and energy. A steeper yield curve is helping top sway opinion. The prospects of a rate hike are looking increasingly unlikely and this too has allowed sentiment to change, allowing equities to rally.

On the day, the S&P ROSE 0.2%. The Dow hit an all-time high rising 0.1% and the Stoxx 600 gained 0.3%.

Currencies were mixed with the dollar strengthening against its peers, the loonie gained 0.2% and the pound rose 0.5%.

Commodities were mixed. WTI rose 1.3% and it is interesting that demand for higher sulphur content crude is increasing. The Trump administration in a first drpped royalty rates in the first U.S. oil gas lease sale. Wheat shed 1.6% as estimates suggested that domestic production could be better than expected. Gold fell 0.2%.

Bonds retreated by about 3 points in the U.S. 10-years following an article in the WSJ suggesting that the ECB could cease QE (article included). The theme is that central banks are looking to hike rates and that of course makes fixed income investors nervous. The yield curve steepened slightly with the 2/30 steeper by about a point to close 155bp, the 2/10 closed at 97.7bp and 10/30 closed at 57.1bp. The Europeans saw bonds weaker with the UK 10 year closing at 1.3% up 4bp, the French benchmark closed up 4 bp to close at 0.875% and the bund closed at 0.53% up 3bp.

The Aussie Market Today

Following Draghi’s comments bonds are unlikely to rally and the general theme is for a slightly weaker bond market. This could also be fuelled by profit taking. The equity market will be positive following the rallies in offshore markets.

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