The US dollar this morning is on the back foot following last night’s slightly dovish minutes from the FOMC. The dollar index is back towards Monday’s 6 and a half month lows, while US bond yields also slipped after the Fed signaled a cautious approach to future rate hikes. The market continues to see the Fed on track for a June lift off, pricing in about a 75 percent chance, but this decision may come down to the wire, with next Friday’s payroll number carrying significant weight.
The minutes highlighted policymakers caution around raising rates, agreeing that they should hold off on hiking until they see evidence that a recent economic slowdown was transitory. The Fed also outlined their strategy for a gradual approach reduction to the size of the central banks $4.5trn balance sheet, in a similar manner to how it tapered its monthly bond buying program.
Staying with the topic of tapering, where the ECB and Bank of Japan are coming under further pressure to look at reducing their current bond buying programs (QE), while also start to prepare markets for the idea of future rate rises. Investors however, continue to take advantage of today’s loose monetary conditions with recent record highs in global equities including the UK’s FTSE, the German DAX, S&P 500 and NASDAQ. In past commentaries we have spoken about the VIX index, colloquially known as the market’s “fear index”, which has fallen below 10 points again this morning. On its face, this makes little sense with world seemingly a more uncertain place than ever before. High valuations, China’s economy, North Korea’s missile testing, Donald Trump’s weekly headlines, Brexit negotiations and the recent global cyber-attacks; it appears there is plenty of fuel for concern.
To put today’s VIX reading into context, since 1990, the ticker has had fewer than 10 days below the 10 point mark. Historical trends from these lows are mixed, with sub 10 readings in 1993 and 2006 having “limited to modest market correction” in the months following according to Morgan Stanley. However, the last time the index touched on these historic lows in 2007, was just before the global financial crises. Some comparisons today can be drawn up the with 2007 global financial crisis. Back then, financial institutions offered teaser rates pre crisis to encourage borrowers with initial low payment charges, after this initial period repayments became too high for borrowers to pay and so began the crisis. Fast forward to today where central banks have introduced cheap money stimulus programs in the form of QE and negative rates to encourage borrowers. With the deadline for these programs seemingly approaching, is history to repeat itself a decade on from the last crisis?
While we are not stating that the next financial crisis is around the corner, we are just highlighting the importance of protecting from such a risk.
On the currency front, the single currency has certainly enjoyed a bull run this month on the back of reduced political risk from the French election, while better than expected Eurozone data has also contributed. The single currency continues to drive toward the 1.13 level, while against the pound it failed overnight at the 1.16 (EURGBP .8620) level and has pulled back towards 1.15 (EURGBP .8695).