Opinion – Thursday 18 December 2014

Last night the Fed tried to have its cake and eat it and in the process left markets slightly confused. Markets have being whipsawing since the release of the Statement with the Euro initially rising against the Dollar before getting slammed late on and that theme has continued overnight with the Euro now trading at 1.2280, just above its lows for 2014. Newswires were initially awash with headlines that the FOMC had dropped the ‘considerable time’ phrase with respect to its guidance on interest rates. Instead they decided it could be ‘patient in beginning to normalise policy’, but the Committee saw the new language as ‘consistent’ with the old language. This messy compromise saw markets sell the Dollar initially.

Other parts of the Statement and the updated economic projections were construed as slightly dovish. The Inflation forecasts (both headline and core) were dropped and the median of the infamous ‘dot points’ was lower for the coming three years. Fisher and Plosser (hawks) moved out of the majority and dissented, suggesting they were dissatisfied with the cautiousness of their peers.

However Fed Chair Yellen delivered comments in her press conference that saw the initial reaction more than reversed. Most importantly, she noted that normalisation is unlikely to begin in the next couple of meetings (i.e.Jan and March), which suggests that April is on the table for the first rate rise. Indeed Yellen also emphasised that a number of participants indicated that lift-off in the middle of 2015 could be appropriate. Of course she made sure to stress the data-dependent nature of such an assessment. The result of all of this saw a rise in 10-Year Bond Yields and a 1.5% rally in the Dollar. Separately, Yellen confirmed the Fed view on the fall in Oil prices as positive for the US economy and that the Fed will look through the dampening impact on inflation.

In other news the Russian Ruble strengthened by 12% yesterday with Central Bank intervention evident.

This morning on the economic front we have the German IFO at 9.00 am. This is followed by UK Retail Sales and GIK Consumer Confidence at 9.30 am and 1.00 pm respectively. At 1.30 pm we have the latest US Weekly Jobless Claims. Finally at 3 pm we have the Philly Fed and Leading Index.

Note: For anybody wanting to attend my analysis of the markets session tonight I will talk in detail about the McClellan Oscillator and its effect on the markets. Following the talk we will head out for an end of year and Christmas drink.

March S&P 500

What a day! The S&P had its best trading day since October 2013 and the highest points move to the upside in over three years. Yet again Fed Chair Janet comes to rescue the stock market which with the ugly close on Tuesday looked like it was going to go back and test the October 15 lows at 1812. The S&P plan worked well yesterday as indicated by the slight improvement in the McClellan Oscillator on Tuesday which fueled the initial rally in the stock market ahead of the FOMC release. This enabled me to cover my long 1967 position just before the announcement at 1994. The S&P then spiked to a 2010 high which enabled me to go short at 2005 and just as Fed Chair Yellen started her press conference the market again dropped hard which allowed me to cover this position at 1996 and I am now flat.

As I started to write this morning the Swiss National Bank has just cut rates to negative and this has seen a spike in all equity Futures markets. Incredibly the S&P has now rallied nearly 60 handles since its Tuesday lows. Yesterday was a very positive day with the MO improving to -92 from a very oversold -252 and was a 90% up-day which should be positive going forward.