The Fed supposedly tried to change its language to a somewhat less friendly tone in its official statement yesterday by suggesting a rate hike may come sooner than never.
The attempt failed.
Based on the ensuing rally, it simply seemed to be whispering “sweet nothings” into the ears of equity investors. Nonetheless, the reality is that the global markets and economic matters are moving beyond the Fed’s ability to even pretend to control despite the stubborn refusal of stock investors to see beyond the computer-generated fantasy land created during most trading days.
The Bank for International Settlements had this to say about the global equity bounce off of the October lows:
“It is, of course, possible to draw comfort from recent events. Those who do so stress the speed of the rebound. At the same time, a more sobering interpretation is also possible. To my mind, these events underline the fragility – dare I say growing fragility? – hidden beneath the markets’ buoyancy. Small pieces of news can generate outsize effects. This, in turn, can amplify mood swings. And it would be imprudent to ignore that markets did not fully stabilise by themselves. Once again, on the heels of the turbulence, major central banks made soothing statements, suggesting that they might delay normalisation in light of evolving macroeconomic conditions. Recent events, if anything, have highlighted once more the degree to which markets are relying on central banks: the markets’ buoyancy hinges on central banks’ every word and deed.”
When the central bank for central banks comes to the conclusion above, maybe there is a problem.
Despite the equity rally, about 40% of small cap stocks in the U.S. are down 20% or more from their highs. Clearly the average stock does not share the euphoria of the S&P 500 or the magic tale its devotees spin. Other markets see trouble too. In addition to crude oil tanking, other commodities are at multi-year lows. Copper, iron ore, precious metals, and coal markets remain depressed. Global yields are sinking to record lows with German bunds near a 0.60% yield. Oil-dependent Russia is in full meltdown mode with its currency and stock market getting crushed. The U.S. treasury yield curve has flattened to levels which have indicated major economic concerns in the past. Junk bonds are struggling mightily with worries suddenly concentrated on the energy sector.
One can only marvel at the confidence of those brave souls still mostly enthralled about large cap equities given this backdrop when dollar strength alone should make robust earnings estimates for 2015 suspect.
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