Fed is indecisive, incoherent and driven by the consensus narrative
By Steen Jakobsen, Saxo Bank's Chief Economist
There is a firm believe among current and former Fed officials that a 2016 hike is still on the table, but it's also clear that Fed and its staff are lost, totally lost, as to where the economy is going, what the strong US dollar means in the medium term and are very concerned on the "structure of the fixed income market". In other words, the Fed is not going to come forward in a clear and decisive way from here but will be swayed by whatever headline is driving the consensus.
There was no love for emerging markets; most people had negative EM as their number one trade and with expectations of considerable underperformance still in store. The one comment which stood out was that if you exclude energy and commodities from EM then it's getting cheap but not yet deeply discounted. However, excluding energy and commodities of course is futile considering the big cap companies' main business' in EM!
EM is cheap on all metrics in my book, but I do agree that you need a catalyst: "...a weaker US dollar in my theory"... to kick start it...
I think both VW and Glencore are big stories, but not as big as market fears. Expect seasonal strength to play out post October 10 and I stick with my S&P projection from August, which means low, is in pretty soon and here's why:
• The world has just moved one step closer to global deflation making "easier monetary policy" the response in a world of no ability to fiscally expand.
• Every time in history when the market has been more than 10% down, with falling commodity prices and a strong USD the Fed would be looking to ease not hike!
• Global easing or pretend-and-extend version 4.0 is close. Central bankers simply don't believe a bloated balance sheet and debt financing is an issue or worse they seems to think economic theory offers no alternatives.