A Minimal Evasive Fed - Market Update

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FAT PROPHETS: All was quiet with the markets on Wednesday with oil dominating the headlines, falling to a 2 ½ year low. Resource stocks bore the brunt of market weakness in Australia, the UK and the US as sentiment continues to be dreadful within the sector. China reported weaker industrial output data, but the Shanghai Composite Index still managed to rise 0.27% to 3,650 in a further sign that the corrective sell off is well and truly over. Our target of 4000 is now only 350 pts away.

The Nikkei closed flat despite comments from the Bank of Japan that more easing is on the way and the ASX 200 managed a bounce back to 5,122, led by strength in the industrials. I remain bullish on Japan and any move by the BoJ to engineer the yen lower will likely be the catalyst for new 30 year highs in the Nikkei. We continue to hold a number of well-known Japanese names in the Global Opportunities portfolio that include Panasonic, Sony, Toyota and Fanuc, the leading robotics manufacturer.

European markets had the best day with the STOXX50 increasing by 0.69% to 3,448 with gains across most regions. The Eurozone is getting ready for more stimulus and easing measures to be introduced by the European Central Bank. In Portugal the government was toppled by a left-wing opposition, while in Germany the 2-year sovereign yield hit a new record low.

In the US the S&P 500 closed flat despite M&A activity remaining strong with SAB Miller formally accepting AB InBev’s offerThe US retailer Macy’s cut its profit forecast once again, blaming the strong dollar.  Overhead resistance on the S&P500 is significant around the 2100 level and I don’t see an upward break until we get clarification from the Fed in terms of which way interest rates are going, in mid- December.

Having said that, I believe the Fed is going to surprise the market, not with a rate hike – that is already priced in – but with “minimal invasive” rhetoric designed to take the heat out of the US dollar. 

The Fed’s minimal invasive change to monetary policy will take the US dollar and global liquidity conditions into account when finally delivered. So that is where the “positive” surprise could come from for the markets and this could drive the US indices to new highs in the first quarter of next year. Any corrective selloff in the US dollar would put a bid underneath the commodity sector which is now heavily oversold.

That is our anticipated scenario for the next several months, and if there is one lesson I have learnt during my career in the markets, it is to expect the unexpected. What seems obvious today, may not be so tomorrow, because everything is constantly changing.

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