As we prepare for the most anticipated rate decision in years equities rallied sharply on Tuesday. Likewise the oil price recovered from multi year lows. Interesting article in the Telegraph on Tuesday suggesting that despite the fall and oil trading at one stage on Monday at levels last seen in the depths of the 2008 bear market, traders are still betting on continued falls. According to the Telegraph hedge funds are taking out record short positions as speculation increases that further falls in the oil price are inevitable. One thing seems almost a guarantee in life in capital markets, when everyone is betting one way, then the consensus view is liable to be wrong.
The one asset class that did not recover yesterday appears to be high yield credit. To be convinced that equities could continue to rally one would expect that market to likewise recover. The vix fell but remained above 20. Ten-year treasury yields rose on Tuesday, but at 2.28% yields remain close to levels they have traded at for most of the year.
Ahead of tonight’s decision the Fed received their last piece of economic data, the November inflation readings. The US inflation rate year on year came in slightly ahead of expectations at 0.5%, against a flat month on month reading. The release of the latest UK inflation data reported that inflation in the UK economy turned positive by 0.1%, the first time in four months.
The latest Merrill Lynch fund manager survey suggests that fund managers remain over weight equities but also overweight cash. They have increased their weighting in energy to a seven year high. Only 7% of fund managers expect a global recession next year.
After yesterdays strong bounce, equities are expected to open slightly higher around Europe. Fund managers will now hope that once the Fed decision is out of the way that yesterday was the beginnings of the year-end rally.
The consensus view amongst traders and analysts ahead of tonight’s announcement is the impact of not acting tonight on equities, should the Fed back away again, will be a negative one. Expectations are that the Fed will go with 0.25%, opinions are divided as to what the reaction will be should the Fed move, but raise only by 0.1%.