By Kay Van-Peterson, Asia Macro Strategist at Saxo Bank
The September Fed hike is on and only seven weeks away - the market is NOT ready for the first rate hike in close to a decade. There are the five main themes that stand out to me:
1. The Fed WILL hike
2. The quantitative-easing dam will break into the rest of the world with new participants being swept up
3. Commodities will accelerate into a multi-year bear market
4. Emerging markets are getting crushed from all sides
They should be viewed on a tactical horizon window up to the next Fed meeting, where we could see squeezes in both the USD and commodities, before the structural multi-year macro currents come back firmly into place. The structural dislocation reset will then be past the point of no return. I have talked excessively about this, so I will keep it brief. This is happening people, Federal Reserve Chair Janet Yellen has been about as clear as she can be that we will be lifting off this year and most likely in September. The slight change in the Federal Open Market Committee statement was not needed for a hike at the next meeting, yet it was hawkishly tweaked.
From my side it's as clear as it can get that the Fed will move. Its last focus seems to be on the labour market and I am super comfortable with the US labour market. Also an 80 basis point revision to 1Q GDP, taking us from -20bp to +60bp, and 2Q coming in at +2.3%. The important thing here is the trend people ... and let's not forget the beat on personal consumption expenditure and the step-up in personal consumption.
I think we are going to be in multiple years of QE, not just out of Japan, but also the Eurozone - forget about September 2016 being the end of the program. We have already had the IMF commenting on QE being beneficial if extended past September 2016 and that's already a year away.
In US that is a much more nimbler beast than the Eurozone, which has 20 different fiscal policies, arguably one-two monetary policies (Bundesbank influence), a mosaic of political interests, not to mention a history of corner cutting and arriving late to its own funeral.
There is just no way it can get away with one round of QE in the Eurozone. Its fiscal and structural issues run a lot deeper than Greece - just ask our new French man on the desk (the dude does not even eat croissants anymore).
What a lot of people are not yet appreciating is yes, while overall global monetary supply will tighten (given the US being the reserve currency of the world), many more countries will join the QE club. With the likes of South Korea and Canada coming to mind. The former has had Japan punching it in the face since 2012 and that is only going to accelerate for the next few years. And the latter has well over two-thirds of its economy linked to energy, in world that will most likely see oil lower for longer (as well as commodities as an asset class).
Go to trades here? Boatloads again, but best of breed to me are long Japan equities, long Eurozone equities (beware the Greeks) versus short US and selective emerging market equities.