A Wonder About Down Under

Articles From: Interactive Brokers
Website: Interactive Brokers

By:

Chief Strategist

Interactive Brokers

US investors, ask yourself honestly: were you at all familiar with the financial acronym “RBA” before this morning? 

I’m going to guess that a good number of readers were not particularly aware of the Reserve Bank of Australia before this morning’s headlines (partial credit if you guessed “Royal Bank of Australia”).  This is not meant to show any disrespect towards Australian central bankers nor my myriad Australian friends, but at least for this morning, the RBA is the world’s trendsetter.

For those who are still wondering what I’m talking about, the RBA raised rates by 25 basis points instead of an expected 50.  That was extrapolated into the idea that global central banks might be somewhat less strident about their rate hiking policies.  To that I’d say, “maybe.”  It’s certainly nice to hope that the anticipated pace of global rate hikes might slow, but Fed Funds futures are largely unmoved.  On Friday they were pricing in a 73% chance of a 75 bp hike.  Today they are pricing in a 71% chance of that move.  It’s difficult to attribute a second day of 2.75% gains in stocks to a 2% smaller chance of a widely anticipated rate hike.  So what is it then?

The simple answer is that a wide range of assets were quite oversold going into the end of the third quarter, which ended Friday.  The pressures felt by UK pension funds that caused the Bank of England[i] to intervene in the gilt market were undoubtedly related to end-of-quarter pressures.  The spike in US treasury yields and the USD now appears to have been similarly exacerbated by end of the quarter rebalancing.  And there are various market reports that insinuate that a huge options roll by JPMorgan hedged equity funds contributed to last week’s selling pressure.

So, we have a new quarter and new hope.  The BOE gave hope about the status of the “Fed Put”, even though it was not driven by equity market conditions.  The RBA gave us hope that the Fed and other central banks might take a less onerous stance.  The Jolts report, which showed a million fewer openings than last month, gave hope that a weaker labor picture might also ease the Fed’s stance (though again, Fed Funds barely budged). 

Over the coming days we’ll learn more about whether the recent dose of “hopium” is borne out by more substantial data.   The payrolls report on Friday and the start of earnings season a week after that will offer some important clarity about whether this two-day rally – powerful as it is – is anything more substantial than a major bounce off deeply oversold conditions.

And by the way, the chart below shows that we’re only back to levels from about a week and a half ago.

S&P 500 Index, 1 Month Chart, 30 Minute Bars

S&P 500 Index, 1 Month Chart, 30 Minute Bars

Source: Interactive Brokers

[i] Extra credit if you knew BOE was Bank of England prior to last week

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