Wednesday 26, January 2022

Wrap

Well, at the press conference after the meeting of the FOMC, Powell confirmed what we already knew: that rates were going up, or, in the carefully chosen language of the chairman, interest-rate hikes will “soon be appropriate.”

The markets never really seem to price their overwhelming consensus in full. Bonds moved a lot, relatively: the 10Y moved 10bp, to 1.8763%. The nearby contract eurodollar future stands at 99.510, implying a 3M rate of 49bp. It moved by 4.5bp, which seems a lot.

The knock-on effects were visible in a fairly predictable way: equities were down again, in the US, even though they had been strong mid-session. ES (S&P500 mini futures) were down 15 points, to 4334. This is still several standard deviations above its trend line. A few mega-cap stocks defied the trend, especially $TSLA and $MSFT, which were both up > 2%.

Energy commodities were up quite steeply, in this case gas moving in tandem with oil, up 4% to $4.21 per MBTu (or whatever the unit is for gas future). Gold, generating no income, was down, as were almost all currencies against the dollar. To me, the very strong inflation in the US should drive the dollar down, but I obviously don’t understand macro well enough.

UK, Chilean and Canadian bonds all swooned. The club of central banks which are losening shrank a lot. Chile’s policy rate is now 5.5%. This is a strong headwind for the economy, but it allowed the currency to continue appreciating. The new government seems to behaving sensibly. Chile has a lot of copper and food commodities. It’s OECD and could be underpriced, as far as its equity market is concerned. I have done zero research, so if you trade on what I just wrote you deserve to lose all your money.