The Day So Far
The FOMC statement last night revealed little, with the FOMC acknowledging improvements in the labour markets but cautious on inflation following the recent tumble in crude. Most importantly, they maintained their data-dependent stance regarding the timing of a first hike since 2006 ‘it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labour market.’ This begs the question: how much is some? The focus will now turn to the next two NFP releases before the next September FOMC meeting. Following the statement, US equities pushed slightly higher and the US 10yr fell to new lows, while the dollar strengthen a touch, pushing the euro below the 1.10 handle.
On US equities, one in five stocks is now in a bear market (20% off their highs), yet the overall indices remain just a couple of percent away from their highs, reflecting the massive internal correction in recent months as leadership has changed hands and increasingly reliant on a fewer start names like Google or Apple to drag the market higher. However, history shows this is of no succour to equity bears; the last two times this happened, 10th October 2014 and 8th November 2012, presaged 11% and 22% rallies respectively. Elsewhere, many of the commodity-reliant stock markets have suffered considerably, with 68% of Canadian stocks in bear territory and 82% of Brazilian equities in the same position.
The Afternoon View
On the agenda today we have US 2nd quarter GDP and initial jobless claims, otherwise investors are likely to continue to pore over the implications of the FOMC statement. We have a short bias for t notes and a long bias in the S&P. Crude should continue higher after the strong $2 bounce after the DoE inventory release yesterday, although gains should be a bit more muted today as crude consolidates under $50 a barrel. However, given the historical positive correlation between the euro and oil, it would need decouple for our bullish call in crude and our bearish view on the euro to play out in our favour. Dollar strength versus the euro is not lacking in catalysts but crude should bounce off these lows back above $50 a barrel in the coming days.
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