Global equities have appear to have stabilized after yesterday’s bloodbath as North American equity futures make their way into positive territory, although the overnight Asian session was unable to avoid the spillover effects from the lacklustre close on Wall Street. Japanese stocks were hammered lower by over 4% as the negative market sentiment and skepticism around the vague nature of the recently announced “Abenomics 2.0” to prop up the economy sent investors heading for the exits. The turmoil did not stop in Japan, with China also watching high-yield asset classes crumble under the weight of sour market sentiment which caused the Shanghai Composite shed over 2% by the time the session was finished.
The carnage experienced in equities yesterday was curious given how insulated currency markets were from similar moves; for the most part, currencies remained with recently prescribed ranges, and the liquidation in equities and commodities did little to shake currencies from those previously defined ranges. What was most likely attributable to the relative calm in currency markets could be chalked up to participant’s confusion as a result of the latest round of Fed-speak, as Dudley and Evans were both on the speaking circuit yesterday. NY Fed President Dudley essentially echoed the comments heard last week from Yellen in that a rate hike in 2015 in the most likely course of action for the Fed, though if monetary policy conditions tighten too much after the first hike then the Fed has the ability to slow the trajectory of future interest rate increases. Things got a little more confusing when the usually dovish Evans said later in the day that he may be convinced to advocate for a rate hike this year if the economy warranted, but said the uncertainty around the inflation picture had him forecasting the first interest rate increase coming in 2016. Fed funds futures for December raised slightly after the dust settled on yesterday’s Fed-speak, with the contract suggesting the chances of an interest rate hike at the December meeting were roughly just over 50% priced in (using conventional wisdom that after a rate hike the average Fed funds rate will be the midpoint of the range); however, given the recent commentary from who are considered the Troika of the Fed (Yellen, Dudley, and Fischer), we would put the odds of a December rate hike somewhere closer to 75%.
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