“He doth bestride the narrow world like a Colossus; and we petty men walk under his huge legs, and peep about to find ourselves dishonorable graves.”
Over the last 7 or 8 years, today has become a day that most stock market operators have fixated on. Unless you’ve been stranded on deserted island with a volleyball named "Wilson," you know what we are referring to – FOMC announcement day. As the Fed has wanton to do since the Great Recession, it has made us feel like petty men as we wait with bated breath on every word from the central planning colossus.
Hopefully, the Fed colossus does not pronounce anything overly surprising. After all, it would be a shame to start digging our investment graves only midway through the year. According to the Barclay’s Hedge Fund Index, hedge funds in aggregate are up right around 4.5% for the year-to-date, so it would only take a little volatility to get the grave of negative returns started.
Inasmuch as we can all criticize the Fed and begrudge our myopic focus on its pronouncements, there is a constituency that has more reason to complain – savers and those who live on fixed incomes. As former Fed Chairman Bernanke noted in a speech in 2012:
“In the case of savers, you know, we think about all these issues, and we certainly recognize that the low interest rates that we’ve been using to try to stimulate investment and expansion of the economy also imposes a cost on savers who have a lower return . . . I guess the response I would make is that the savers in our economy are dependent on a healthy economy in order to get adequate return. … So I think what we need to do, as is often the case when the economy gets into a very weak situation, then low interest rates are needed to help restore the economy to something closer to full employment and to increase growth and that, in return, will lead ultimately to higher returns across all assets for savers and investors.”
So in theory, savers will eventually get a return, which is fair, except that interest rates have been at ZIRP for six and half years. (Side note: the average expansion since World War 2 has only lasted six years!)
Back to the Global Macro Grind...
Speaking of volatility, my colleague and resident Hedgeye energy analyst Ben Ryan put together an interesting Chart of the Day this morning on commodity volatility. While much has been made about the increased volatility on the bond market over the course of the year, volatility in the commodity market has remained somewhat muted this year.
The chart shows two key things. First, specifically related to energy based commodities, their volatility typical spikes into FOMC announcements. Second, these same commodities are near their lows of the year in terms of implied volatility. So, what do you think, is the world of energy commodities going to get more or less volatility in coming months?
Speaking of graves, for those investors that have been long the commodity market over the last month, their graves may have been dug. We track 21 major commodities and over the last month 16 of them have had negative performance. In the period, the five worst performers were as follows:
Sugar - -12.3%
Copper - -11.31%
Silver - -8.92%
Hogs - -7.44%
Nickel - -7.31%
The weakness over the last month is likely partially driven by a stronger dollar, but also on some level indicative of a global economy that is not firing on all cylinders. How else to explain such a broad based underperformance of seemingly unrelated commodities like sugar and nickel over the last month?
But as we’ve alluded to, the next move in commodities may well be a function of the next move in the central banking colossus, which could come today. On that note, Keith is over in Europe visiting subscribers on the continent this morning, but in his Direct from KM note this morning (ping if you want to be added), he said the following:
“Day 3 in London and oh boy is sentiment bearish – could make for a rip higher (stocks, bonds, commodities) on Fed day:
- US Dollar – if you ask Doctor Dollar, Janet may very well do what I think she should do and stay “data dependent” with no timing on rates – that would = Down Dollar, Down Rates – Up almost Everything (much like my March 18th FOMC meeting call); I think both US equity futures (yesterday), and Oil again today are front-running this scenario
- VIX – ramped right to the top-end of my range yesterday then backed off – no support to 12.75 on a potential buy everything ramp – sentiment is bearish (both this morning’s II Bull/Bear Spread at YTD lows and SPX NET SHORT position (futures/options) at YTD highs)
- EUROPE – sorry, you get #StrongerEuro on this – and the DAX, CAC (both -4% in the last month) no likey Down Dollar because it means up Euro – so I like long US Equities still vs short EuroStoxx with the Slower-For-Longer (down rates) view, for now … “
Good luck out there on Fed Day! And god speed to the day when we petty men (and women) can stop worrying about the Fed.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.16-2.49%
Oil (WTI) 58.11-61.90
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research