Wednesday, January 29, 2014

Emerging Market Volatility Unsettling To Investors

Most of the talk from international markets has centered around Turkey lately, where the lira has been falling and the govt worried about capital outflows from the country.  Last night, Turkey's central bank held an emergency meeting where they raised their key rate from 7.75% to 12.00%.

That's a big rate hike and it briefly stemmed the tide.  The lira rallied in response, and S&P futures that trade overnight also rallied.  Asian markets also rallied in response.  The Japanese yen moved lower and helped Japan's stock market rally +2.7%.

But as the night wore on the initial effect of the Turkish central bank move wore off.  The lira began to weaken and so did other foreign currencies like the Russian ruble.  By this morning, European markets were lower and our markets opened on the downside as well.

The People's Bank of China added more liquidity to try to help.  Today we will hear from the Fed here in the US, but they are unlikely to alter their plan based on a couple of days of volatility in emerging market currencies.  The Fed will likely reduce their asset purchases by another $10b to $65b per month for now.

The 10-year yield is down another 3 bps to 2.71%.  And there is a bit of a flight to safety into gold given the currency concerns.  The yellow metal is up to $1265 today.

The volatility index spiked back to the 18 level this morning, but it has since faded back to 17.17, up 8% so far.

Trading comment: Volumes will likely be running a little lower than average until after the FOMC meeting.  We think it is likely that the Fed will reiterate the same themes from last meeting, and continue their 'taper' with an additional $10b reduction in the pace of their asset purchases.  Remember, even while they are reducing their asset purchases they are still buying more securities and increasing the size of their balance sheet.  But the economy seems on solid footing and they will likely recognize that in their commentary.  As for the stock market, still sitting on our hands as we watch the market try to find some solid support levels.  So far SPX 1775 has held again.


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