Global Markets Overview – 11/19/13

Misinterpreting the Fed

It was a very interesting trading session in the US, with the S&P and the Dow jumping over key psychological marks of 1800 and 16,000 points respectively (both record highs).

Both then fell before the close on Carl Icahn's comments that 'the US market could have a big drop'.

Just like his call on Apple at the start of the year that it was his top pick and saw a 5.7% move in three hours, his call on the US markets saw the DOW and the S&P move heavily in other direction.

However I think there is more to this move than just one of the biggest hedge fund managers in the world saying so. Again it is coming down to Fed chatter and misinterpretation of language.

The statements from New York Fed president Bill Dudley that he is 'getting more hopeful' that the US economy is strengthening would usually be taken as a sign that QE could be unwound. But in the same sentence he stated 'policy will likely remain accommodative for a long time to come'.

That is market double speak at its best; it is open ended and easily interpreted as either positive for QE or negative for QE, yet gives no signs as to when and how the program will be unwound or what size the Fed is happy to close at.

Chairperson elect Janet Yellen in her testimony last Thursday stated the economy hasn't reached its 'potential' yet and for that reason believes the current policy stance should remain.

'Potential' by its very definition is an interpretation and this again gives no clues as to what size quantitative easing will be, how she plans to exit the program or when the program will even start being wound back. Then there were the comments from Philly Fed president Charles Plosser overnight carry this point; 'the central bank needs to set the final size for QE and end the program once that amount is reached.' end statement.

I feel a real sense of déjà vu with the Fed's miscommunication; Fed Chairman Ben Bernanke started the rush to the exit after his 'there is a possibility' Freudian slip at his May testimony.

The Fed needs to start being forthright with all of the points above; the record highs the US markets are printing which have seen P/E expansion jumping well above the historical average cannot continue with just unconventional monetary policy. They are going to have to stand alone soon enough.

There are several things that I believe can be drawn from the comments above. The $85 billion of purchases in treasuries and mortgage-backed securities are here to stay until December 31. January also is likely to see the taps on full as it is the final meeting before Bernanke steps aside. In February, Yellen will take over and will (hopefully) outlay how her intention on how to run the program.

This why most economists believe March is the most likely meeting to start unwinding quantitative easing and for that reason record prints in the US markets are here to stay until Christmas.

However, the markets will start to front run the Fed like they did in August leading into the September meeting. Come late January I suspect there will be a change of sentiment from fund managers and hedge funds alike as they start to predict the end and that will affect the current run.

Ahead of the Australian open

Ahead of the open we are calling the ASX 200 down 24 points to 5362, down 0.4%, as the Australian market gets pushed around by the strong moves from its US counterpart. BHP's ADR is suggesting the stock could fall 11 cents having closed in the green yesterday, opening at $37.84 (-0.28%) and may lead the slide.

The RBA monetary policy minutes that are released at 11:30 AEDT will be interesting. The AUD has remained fixed above 93 cents, having tried to fall through this point several times over the past month only to jump back up on USD weakness and China data.

Glenn Stevens has a big interest in the Fed's policy as he has been trying to jawbone the AUD lower, but threating to low the cash rates further still - I see this as very unlikely.

The minutes may provide insight as to how the RBA will tackle the high AUD against the issue of cheap lending for housing that is causing house prices across the country (Sydney in particular) to jump some 15% in 11 months with rates at record lows.

If the wording is more concerned with housing and ease lending than the AUD, the 93 cent floor will be locked in. Those praying for an AUD below 90 cents will have to hope the Fed will strengthen the USD rather than the RBA weakening the AUD.

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