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FOMC Minutes Preview: Beware The Hawkish Jolt

Wednesday, October 12, 2016 11:10
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Today’s release of September’s FOMC minutes comes at a bad time for fragile markets and will intensify risk-aversion, according to Bloomberg’s Mark Cudmore. Based on the rhetoric from Fed officials in the days following the Sept. 21 decision, the minutes will emphasize that the committee are keen to raise rates, and that all meetings are live -– including November.

Stocks are flat post-FOMC, Gold the worst hit…

In the short term, it’ll be irrelevant that a November hike is extremely unlikely in practice. Not just because of the presidential election, but also because of this month’s mounting market stress and the fact that the recent data pick-up will be insufficient to justify a hike so soon.

What matters is that the sound bites will put November back in play as a possibility and that will provide the hawkish spin to today’s minutes.

U.S. yields and the dollar have already broken out bullishly. Today will just be the confirmation. The Bloomberg Dollar Spot Index is likely to trade to the highest level in almost seven months.

In turn, these moves will further squeeze emerging markets and equities at a vulnerable time. Regulatory changes have contributed to three-month Libor already climbing 65 basis points — more than doubling that key rate — during the past year and squeezing liquidity at the margin.

The EM bull market has been stagnant for more than two months and yesterday’s political shenanigans in South Africa have reminded investors that a downside correction may be the more likely next move.

It doesn’t matter if a more balanced assessment of the minutes in the coming weeks subsequently rules out November again. The technical damage likely to be done during the next 24 hours will provide both another shock to markets and further boost to broader volatility.


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