Strange times are these, Plato

What a strange old world we live in, it’s hard to remember a time when the world felt in such a flux. If global equity markets climb a wall of worry, then there remain plenty of bricks. Yet, if the latest economic data is to be believed, somehow the real world continues to rotate almost unnerved. One of the well-worn bricks is what will the Federal Reserve do to interest rates, and when? More recent ones are, who will walk through the Oval door in a few days’ time, as both candidates seem equally unpalatable. Will the vote to instigate Hillary Clinton plunge the United States into a constitutional crisis? The latest brick was delivered on Thursday, as the Brexit referendum was thrown into a complete disarray after the Lords decided that article 50 could not be triggered without parliamentary approval. Geo political tensions between Russia and the western world are almost taking a backseat.

In some measure, the fact the Vix index has risen back above 20 is hardly surprising as the S&P 500 fell for the 8th day running, the longest losing streak since 2011. On Wednesday, the Federal Reserve announced they had decided to leave interest rates where they are currently. The release of the minutes from the last meeting revealed a few slight changes to the wording from the previous statement. Crossed out was the phrase that inflation was “expected to remain low in the near term”. The committee judged that the case to increase the Fed funds rate “has continued to strengthen”. However, they decided to wait for “some” further evidence of continued progress towards its objectives. The addition of the word some appears to have drawn the most attention amongst market analysts as this reinforces the believe that should economic trends remain stable then the Federal Reserve will move in December.

Mark Carney presenting the Bank of England’s latest inflation report, now believes inflation will exceed the Bank’s 2% inflation target next year, and has increased growth forecasts from 0.8% to 1.4% for 2017. We can probably now rule out both forecasts as being correct, if history is anything to go by. Further cuts in interest rates, to no surprise, are off the table. What is more probably going to be debated by the monetary policy committee is how long can they wait before they must reverse Augusts actions.

As we enter the last few weeks of the year, investors may now start to anticipate the Yule tide rally. So, have we seen enough fear so this to occur? The FTSE 100 has now given back circa 5% from the peak, the S&P 500 a similar amount, close to what technical analysts look for during periods of consolidation. The Vix is once again trading above 20, often a time to buy. US Bond yields hardly moved on Thursday, so no panic there, with bond yields where they are, and with cash on the side-lines,  fund managers may be tempted to dip their toes. 

Posted on November 4, 2016 .