Market Thoughts Before FOMC : It Is Always A Surprise

Why is it called a surprise rate cut ? There is nothing surprising about rate cuts when we get an average of over 2 a week, with the count this year coming to 24 just after just 9 weeks and 2 Asian central banks, Thailand and South Korea, cutting their rates last week as the ECB launched their $ 1 trillion bond buying programme that will span 18 months and perhaps more, if necessary.

The number rises to 25 if we consider Russia cutting their rates over last weekend.

We know there will be no surprise from anywhere else in the world this week except for the US as we await the FOMC announcement on Thursday morning at 2 am SG time. And the fixation is with the word PATIENCE, which if removed, would probably lead to the Dow tanking another 400 points overnight because we will see a rate hike in June.

So far, no one is thinking too much into these rate cuts which have all been assumed to be the right responses to the ECB’s Q€ and the ugly signs of deflation, just like no one is questioning why nearly € 1.2 trillion of bonds in Europe are trading in negative yields and even though the ECB has a floor of -0.2% on the yield target for their purchases, 10% of those negative yielding bonds are already trading below -0.2%.

No one is thinking why Nestle EUR bonds are trading in negative yield terms or even why supra national debt which do not qualify for the Q€ are trading negative as well.


And the media is egging the central banks on as it seems that Asian central banks are cutting rates too slowly in the face of deflation.

This is almost a mirror image of the 1997 financial crisis in Asia where central banks were hiking their pants off and the Asean miracle growth story came to a temporary halt then. And it is much the same now, marching to the tune of what they are told to do – cut, cut, cut, because its deflation time and because the world’s leading economies and media says so.

I think the imbalances are stretching too far for our imaginations, testing the limits of our analytical abilities.

The scenario is playing out to a script that does not have a happy ending but that knowledge cannot prevent central banks from playing ball with each other to hope that at least if we fall, we will all fall together. And in doing do, the smaller central banks have just pledged themselves hostages to the powers than run the world.

Never has there been a time when we have seen such a high level of central bank involvement in global markets that without them, anarchy will  be loosed upon the world. And for such a prolonged period, economies have been on life support, weak and feeble without the knowledge of easy money that only the top central banks are able to print while the rest do not have the same privileges. Imagine what would happen if China or India or Brazil decided to do their own QE ?

Why is it that only the Fed, BOJ, BOE and ECB are allowed to QE away ?

Academics will say its the debt/gdp, the savings rate, surpluses, Pigou effect, Taylor’s rule etc.

I think it is Hotel California and the biggest uncertainties are the central banks.

Janet Yellen is the shepherdess of the world right now.

Just when March is not her lucky month too !! as the Chinese zodiac would have it.

“The start of 2015 Yin Wood Sheep year contains her negative element wood, so the first half of the year, especially March might hold a few challenges for Yellen.”

Market positioning is on the edge as far as forex is concerned.


And market sentiment on equities is veering towards neutral as margin debt tapers off its peak.

American Association of Individual Investors Bull/Bear/Neutral Survey

American Association of Individual Investors Bull/Bear/Neutral Survey





And it really does not matter if the Fed hikes or remains patient today.

The result will still be a SURPRISE and every minute a Minsky Moment.