Dollar Rises 7 Days, VIX Below 10 and a Fed Hike Assumed
Risk trends are firm ahead of the Fed decision with equities on mixed paths with the VIX up one day in six sessions. This quiet belies an expected Fed rate hike. Is there unexpected volatility ahead?
- Markets have fully priced in (100% probability according to Fed Fund futures) a Fed hike, and the Dollar has climbed 7 straight days
- VIX finally ended its steady tumble into the abyss of inactivity, but the first uptick in 6 days still finds it below 10
- The Fed decision is top listing ahead; but US CPI, UK Jobs, ECB and BoE rate decisions are ahead while cryptocurrency explodes
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A faintest sense of concern showed up in the markets on the eve of the Federal Reserve's last rate decision for the year. The VIX volatility index ticked higher Tuesday for the first increase on a day-over-day basis in six consecutive sessions. Yet, the climb didn't even crack 10 - which is the threshold that I use to tally the persistence of extreme complacency in the financial system. That is how engrained the sense of stability and extreme risk chasing has become for the market. Yet, while there is no inkling of fear that we are over extended via this popular measure, there is notably a lack of consistent speculative build up across the risk-oriented markets. In US equities, the S&P 500 and Dow hit record highs, but the tech-heavy Nasdaq was still in its range. European and Asian indices were notably tracing out their respective ranges. Meanwhile, emerging markets and their currencies continued to show a moderate sense of strain under the extremely low yield they have to offer against a backdrop of very clear risk of funds. Is there enough fundamental event risk on the horizon to destabilize this uneven platform for confidence when the countdown to holiday liquidity drain continues to tick?
One of the most prominent pieces of event risk for the week is dead ahead: the Federal Reserve rate decision. As the world's largest central bank presiding over the largest economy and the most integrated global financial system; this bank's policy making matters to all speculators. And yet, they have done a great job of setting expectations. We are heading into this meeting with a very clear expectation of how it will play out. According to Fed Funds futures, there is a 100 percent probability that the group will lift the benchmark range another 25 basis points to a median of 1.375 percent - the third hike of the year. That leaves no room for the unexpected, but the Fed has little intention of doing the unexpected as they clearly are attempting to avoid volatility at all costs. Given the clear assumption of the market, hiking rates will render little to the Dollar, US assets or global risk exposure as it is fully accounted for. Instead, speculation will - as it often does - rest on the outlook for the future of policy. For that, we will focus on the rate forecasts that will be offered up as part of the Summary of Economic Projections (SEP). In September, the Fed said it expected 3 hikes in 2018, but the market has been running a discount to that view. Here is where the speculation will gain traction for bulls or bears.
While the focus will be on the Fed, the fixation heading into the event will not provide the commensurate impact. Given the binary outcomes presumed, it is likely that the CPI reading that will hit the wires before the rate decision will do more to shape the future policy and its influence on the financial system. Meanwhile, we have other events on the docket that will garner fewer headlines but are open to greater variability in their possible outcomes. The Pound has extended its slow retreat despite the UK's own consumer inflation report hitting a six-year high above the BoE's tolerance range. Wednesday, we have the UK jobs figures followed by Thursday's BoE rate decision. Both the ECB and SNB decisions are on tap for the same day. Outside major economies and fiat, cryptocurrencies have in the meantime been fully overrun by speculative interest. Bitcoin continues to show exceptional volatility and managed a new record high, but the ease of trading and cheaper market levels of Ethereum and Litecoin have clearly drawn in traders looking for acces on the craze. We discuss all of these developments and more in today's Trading Video.
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