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Equities at risk pre-Yellen’s testimony

FOMC Chair Janet Yellen will testify regarding the US economic outlook before the Joint Economic Committee in Washington DC.

 

Yellen will speak for the first time after the mispriced Trump victory moved the markets tremendously following the US presidential election on November 8th. Despite the remarkable sell-off in the US bond markets, the significant upside shift in the US sovereign curve and rising inflation expectations, suggests Janet Yellen is expected to sound cautious and to refrain from giving too much credit to recent turbulences in the financial markets. This is the major downside risk in the US and global equity markets today. 

 

Have the markets got ahead of themselves? Is the post-Trump rally sustainable? Have global equities hit the top? Is it time for a correction?

 

Although many questions will remain unanswered, investors will race to pick-up any hint regarding changes in the FOMC’s future outlook, if any.

 

Of course, as the US prepares to expand government spending under Trump’s presidency, the Federal Reserve (Fed) may decide to speed up the interest rate normalisation process in order to avoid an unsolicited overheating in the US economy and inflation.

 

Through Yellen’s testimony, the global markets will a take a chance to readjust their Fed forecasts, to calibrate their US rate hike expectations and to position themselves to the new era under the Republican lead.

 

The market sees a December Fed rate hike as granted up to 94%. What is more important is the steepness of the Fed’s policy. How many rate hikes should be expected in 2017? As of today, two to four rate hikes would be reasonable, depending on how many of Trump’s promises will go through the line.

 

The net capital outflow from the US assets summed up to $152.9 billion in September, as foreign investors sold a record net value of $76.6 billion in US Treasuries. China unwound more than 2% of its US holdings. The post-November 8th sell-off in US Treasuries accelerated considerably, hinting that investors worldwide are preparing for a notably hawkish Fed.

 

Bank of Japan on the track

 

The Bank of Japan (BoJ) surprised with its plans to buy unlimited amount of Japanese government bonds at fixed rates. The Japan 10-year yields rose past 30%. The USDJPY is set to test the 110 handle, as the BoJ is reinforcing its credibility.

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