April may be the date of first US rate rise

Market Review

Yesterday's trading session saw the downside in stocks being halted after three days in a row with a sell off from the all time highs. The market bottomed out in the afternoon after the cash open provided some temporary downside and other indices such as Nasdaq saw increased selling volume. The bounce that followed saw no real reaction in the bond sector, but followed the currencies which had seen the USD weaker across assets, and the correlation reminded us of the one that had been in place at the height of the financial crisis when dollar weakness generally meant risk on as there was an increased chance of monetary stimulus, as well as the dollar being a safe haven weakening was a general sign of money flowing in to risk assets. The strategy entry in the S&P was coincidentally the low of the session and the first target was obtained. No other entries were hit. 

Today's Fundamental View

This morning we have received lacklustre European data from France and the Netherlands, leading to an aggressive sell off in stocks across the equity space. Looking at the text from yesterday’s FOMC minutes, there were two things that moved the market and that we need to be aware of through today’s session. First is the end of QE: Many have speculated this will be December, but the Federal Reserve gave a clear guide view and said they wanted to end the program in October. What this means is that if the rate hike comes in line with Janet Yellen’s accidental 6 month outlook after the end of the QE programme, may indicate that the rate guidance have changed and that April may be the date of the first rate rise, which the head of trading here at Amplify indicated last week as his official stance. The second part of the release is that the Fed will continue to re-invest the income from bonds already purchased after the interest rate have been raised. This is a change from policy which previously implied that this would have stopped alongside the QE programme. What this effectively does is maintaining the monetary base, but is not quantitative easing as it hardly can be viewed as an expansionary policy measure; though compared with previous consensus it will have an impact on the market. Essentially investors are now at a point of indecision as it makes it more unclear as to where the currency market will head the next six months or so. We believe that essentially, no matter how one chooses to look at this, there will be a rate hike – and this will strengthen the dollar. With the current change in re-investment policy it is likely that the sterling will strengthen more, as it has as of late, and the euro with its potential for expansion will weaken. So overall, even though the new guidance adds potential for both up and downside, the guidance actually makes it clearer if you pin in pairs and look at the underlying. Medium term targets for the EURUSD should be more conservative than previously estimated. This afternoon will hopefully be action filled with data at 1330BST and 1500BST; we are expecting both releases to show strong numbers. The Non-Farm Payrolls and Unemployment report last Thursday was sensational, although we maintain some reservations as to the quality of jobs created, and it would be interesting if the claims would support the NFP and unemployment results during today’s session. Looking at the aggressive sell off this morning in stocks, we are looking at strong technical entries in equities and we expect a small rebound. EURUSD should continue lower and we can see a reversal in US10Y movement, with crude continuing lower. 
 

Alternative View

Hawkish monetary policy comments may adversely affect today’s strategy.