The Fed was much more dovish than expected igniting a stock rally and US dollar selloff

June 19, 2014

If I had of have to bet money on what the Fed was going to say this morning (and lets face it I did given I was short AUD, EUR and S&P500 :S ) I would not have thought for a second that Janet Yellen would have been anywhere near as dovish as she was.

For traders the important thing to takeaway is that Yellen has in many ways signalled that the Fed is the only game in town. Indeed I was amazed that she was dismissive of recent data. In context tough that’s not unusual because central banking has always been interpretive with the RBA, FED, BoE and their respective cousins around the world have used an element of subjective judgement.

But if Yellen is going to dismiss the data then what that means for markets is that we have lost any other lever on which to assess the outlook other than the Fed. Which is okay while Yellen is a dove but if she does a Carney and turns hawk without signalling it to the market its is going to be a big day for volatility.

The other truly remarkable thing about the dovishness of this Fed decision (which by the way did taper by another $10 billion) is how clueless the FOMC is as a group on where rates will be at the end of 2015. When you look at the “Dot Plot” “at least one FOMC member now sees interest rates at the end of 2015 at each rate between 0.25% and 2.25%.”

Anyway as one of my best bosses ever told me “Greg, it is what it is” – which is just another way to say trade the market in front of you.

At the close of play the wash up from a dovish Fed, uncertain or untrusting about the economic outlook, has goosed the stock market higher, helped 10 year Treasuries rally 6 points back to 2.59% (a good sign for the rally which forestalls any Minsky Moment for the time being) and reverted to the weapon it has consistently used to kick growth since 2009 – a weaker US dollar.

Summing up the Dow ripped 99 points higher for a gain of 0.59% to 16,907, the Nasdaq gained the same percentage to close at 4,363 while the S&P 500 climbed a solid 15 points to 1,957 for a gain of 0.77%.

Europe missed the Fed induced rally and will catch up this afternoon most likely. At last nights close however the FTSE was up 0.18% to 6,779, the DAX rose 0.10% to 9,930 while the CAC dropped back 0.13% to 4,530. Milanese stocks rose 0.15% while those in Madrid were up 0.48%.

Locally the wash up is that the SPI 200 futures rose 16 points to 5398 bid after a weak day yesterday which say the physical close at down 0.3% at 5,382.7.

Turning quickly to bonds the rally in the US helped 10 year Bunds and Gilts which rallied 1.7% and 1.41% respectively to close at 1.38% and 2.74% respectively. Locally 3 year bonds on the SFE rose 5 points to 97.21 (2.79%) while the 10′s rose 6 points to 96.31 (3.69%).

On currency markets the US dollar was poll axed by Yellen and the Fed losing ground across the board. The Aussie was one of the primary beneficiaries rallying back to 94 cents and it sits at 0.9399 at the moment. Euro also rallied and is back at 1.3587 and GBP is closing in on 1.70 again at 1.6987 this morning. Hard to see the US dollar gaining traction again anytime soon.

On commodities iron ore was down a little to $89.50 tonne, Newcastle coal fell 75 cents tonne to $71.80 and Nymex Jun crude was down 39 cents closing at $106.04. Copper closed at $3.06 lb while gold is still resting around $1270 oz and Silver just below $20. On the Ags it was a day of green for a change with corn up 0.63%, wheat rose 0.90% and soybeans gained 0.77%.

On the data front it is relatively quiet in our timezone with  the release in Japan of the activity, leading and coincident indices to be released while at home only the RBA Bulletin (scholarly type articles) and the report of the RBA’s FX transaction out. tonight retail sales in the UK and the Philly Fed’s manufacturing survey are important. Jobless claims are of course also out it being Thursday.

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