Jacob Pouncey
Hype among retail investors drove the 2017 crypto bull market to feverish highs as newcomers sought quick and big profits. But a raft of regulatory changes as well as the launch of futures mean those days are long gone and the story of 2018 so far is of depressed sentiment and prices.
Article / 15 December 2015 at 13:49 GMT

Markets testing the Fed's resolve ahead of D-Day

Head of Trading / The ECU Group plc
United Kingdom

  • Fed should deliver tomorrow but equities are a worry
  • Equity market reaction will steer hike pace afterwards
  • US CPI comes in bang on target - boosts hike expectations

By Neil Staines

While economists and commentators remain uniformly behind the initiation of the normalisation process by the Fed tomorrow night, financial markets are likely testing the Fed’s resolve. With the commodities, junk bonds (credit), EM and quantitative easing bubbles all bursting, the Fed’s big worry must be that equity markets might be next (and the significant negative wealth effect on the US that accompanies any material fall). 

We find it very difficult to find a convincing rationale why the Fed would not deliver a hike tomorrow but it is likely that the pace of hikes from here, or at least the timing of the next rate hike, becomes a function of the equity market reaction to tomorrow’s announcement.

Credit where credit’s due

The news on Friday that Third Avenue Management is winding up its ‘Focused Credit Fund’ prompted plenty of parallels with the closure of mortgage backed credit funds ahead of the financial crisis in 2008. Since 2008, some $240 billion has been poured into junk bonds, financing the US shale gas boom and giving the cheapest money ever to companies deemed by credit rating agency Moody’s to be of “very high credit risk, poor standing”. Now, markets are finding out what happens when the music stops and everyone wants their money back at the same time. Liquidity concerns and deteriorating investor sentiment have already spread from credit to FX and equities, as the whole world steps back to listen to what the Fed has to say. The result, is markedly higher volatility.

Third Avenue Management HQ

 When everybody wants out simultaneously, bad things happen. Photo. Google Maps

Inflated expectations?

This afternoon’s data highlight was the US CPI release for November, which delivered an on-forecast 2.0% annual rise in core prices, in line with the Fed's target. We remain of the opinion that next year the risk is for higher inflation (even after the recent oil price move). As the very steep oil price declines of November and December 2014 fall out of the annual comparison, 2016 should see a marked uptick in headline and core inflation prints globally. 

The debate for 2016 is likely over how big the impact is on headline prices globally, and how long the impact lasts in the face of more recent price declines. A 2.0% core inflation print should, in our view, all but confirm a Fed rate hike tomorrow. However, with oil prices and equity markets showing increasing signs of fragility, nervousness over the announcement will likely remain elevated and liquidity will almost certainly remain low.

On the data front, the news from the global economy has been more encouraging of late. The cyclical upswing in the eurozone continues, with signs of stabilisation in a number of core countries as well as the higher beta Spanish recovery story. China data stabilisation (stronger industrial production) over the weekend is also encouraging and while we expect the Chinese growth trajectory to continue to decline over the course of next year, the recent bounce is likely supportive to sentiment, and has certainly helped stabilise AUD and NZD in FX markets.

As we move towards tomorrow’s Fed announcement, FX direction is likely to be more a function of positions being taken off rather than initiated. Illiquidity and volatility have been exacerbated by the extreme moves following the European Central Bank disappointment and the proximity to year end. From there it is down to the Fed.

– Edited by Clare MacCarthy


Neil Staines is head of trading at The ECU Group

tradingwithapro tradingwithapro
This comment has been redacted


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail