VOTE OF NO CONFIDENCE
No one said it was easy to be a central banker. Those that disagree can cite that being the world’s largest asset owners, without the concerns over returns, margin calls, redemptions or leverage ratios is a luxury that none of us enjoy. However, when the fate of every asset class hangs in the balance of every action and word a central banker utters, some sleepless nights can ensue. By now we have stated and restated our strong feelings that the Fed’s inaction last week was largely a response to the global volatility that emerged since August. Within this vein, we infer that the Fed was hoping to sooth the savage beast within the market by maintaining the status quo on rates while pontificating that things were improving enough that a rate hike was still possible later this year. That message was delivered by Chairman Yellen during the press conference and since reaffirmed by Fed President’s Williams, Bullard and Lockhart over the past few days. We have no doubt that the Chairman herself will remain on message when she speaks at a function tomorrow evening. However, instead of eliciting the desired calm, the markets have reacted with heightened volatility as the Fed’s actions were interpreted as growing concern over the state of the global economy and further fallout from weakness in China. Ironically, many risk assets have been stabilizing since the start of the month, as shown in the table below. Since the FOMC meeting, however, sovereign yields have collapsed and volatility has increased in the equity and FX markets. Global stocks in particular have struggled, with no form of promised central bank largess able to break the funk within the markets. Even ECB’s president Draghi’s dovish statements today resulted in a less than robust move for risk assets. Most U.S. stock indices are down almost 3% since last Thursday, while Euro bourses are between 3% and 6% weaker. Ironically, the Shanghai exchange is a relative outperformer, down only 1% during this period, although we certainly don’t think we have seen the end of violent price swings from China.