Yen

After a furious three day "dash for trash", no volume, no breadth, commodity-driven rally, even Santa is now exhausted and overnight US equity index futures were little changed with European and Asian shares mixed. The dollar has declines as gold, silver gain, with WTI initially continuing its recent meteoric rise (up over 8% in the past three days, nearly hitting $38), only to reverse and give up all overnight gains moments ago. Copper falls after Chinese stocks see a second day of weakness, down 0.7% while an unexpected tumble in the USDJPY to 7 weeks lows has dragged the Nikkei (-0.5%) and its futures down.

At the end of the day, the Fed led central bank money printing spree of the past two decades resulted in what is functionally a massive dollar short. Once the Fed stopped expanding its balance sheet when QE officially ended in October 2014, it was only a matter of time before all the “near-dollars” of the world would come under enormous downward pressure in the FX markets. Our Keynesian witch doctors believe that sinking currencies are a wonderful thing, of course. They claim making your country poorer is a good way to stimulate export growth and a virtuous cycle of spending and growth. But there is another thing. It is also a good way to generate capital flight and the ensuing chaos that creates.

The first Fed rate hike in seven years was supposed to trigger a powerful equity rally as the bulls expected money to pour out of bonds into stocks; especially into the cyclicals. Unfortunately for the equity bulls,, as Mizuho's Steve Ricchiuto notes, this time things are different and instead of the Fed rate hike triggering the traditional Santa Claus rally; it looks like the FOMC is actually the Grinch. The key message delivered by the Fed though the SEP, the DOTS and the Chair’s post meeting press conference is that this is the best the economy is going to get.

"Since the risk of Quantitative Failure brings with it the risk of more extreme policies/politics in 2016, the natural hedges are gold & volatility. Gold in particular will be interesting to watch in coming months. The Fed’s determination to raise rates means gold prices should fall. If in contrast gold rises with Fed hikes that’s a clear sign of a “policy mistake” and investors anticipating the need for more inflationary policies next year."

When the 'Land of the Rising Sun' jumps into the abyss...

For a brief few minutes, overnight saw exactly the reaction that central planners had hoped for when The Bank Of Japan announced it would buy 'moar' stock ETFs and extend bond duration buying ad nauseum. However, within just 15 minutes something happened that we haven't seen since the world embarked on this experimental nightmare. Despite the front-ran promises to buy Japanese stocks "whatever it takes" traders sold... and sold large.

Following the latest BOJ statement, the market found itself wrongfooted assuming the BOJ was actually launching another episode of easing, sending the USDJPY soaring, until suddenly the realization swept the market that not only was the incremental action not really material, but even Kuroda spoke shortly after the announcement, confirming that "today's decision wasn't additional easing." The result was one of the biggest FX headfakes in recent days, perhaps on par with that from December 4 when EUR shorts were crushed, as the biggest carry pair first soared then tumbled and since the Yen correlation drives so many risk assets, also pulled down not only Japanese stocks but US equity futures.

Heading into the Fed's first "dovish" rate hike in nearly a decade, the consensus was two-fold: as a result of relentless telegraphing of the Fed's intentions, the hike is priced in, and it will be a "dovish" hike, with the Fed lowering its forecast for the number of hikes over the next year. Consensus was once again wrong on both accounts: first the rate hike was far more hawkish than most had expected (see previous post), and - judging by the surge in Asian, European stocks and US equity futures - the "market" simply is enamored with such hawkish hikes which will soon soak up trillions in liquidity from the financial system.

The "long dollar" trade may be the most crowded ever but that doesn't mean there aren't disagreements where the greenback goes from here, especially after the Fed's historic first rate hike.

How much do you think your paper currency will be worth 23 centuries from now? Or even 23 years? Or potentially even 23 months?

China did everything it could to prevent a collapse and it still happened.  How do you think other countries will do?

The start of the Fed's most eagerly awaited two-day policy meeting in years has finally arrived with the market expecting Yellen to announce the first 25 bps rate hike in 9 years tomorrow with nearly 80% probability, and so far US equity futures are enjoying a last minute relief rally, while emerging market stocks rose for the first day in ten after the longest losing run since June. Europe's Stoxx 600 Index has also rebounded from a five-day losing streak, the worst in over four months.

Seven years of zero rates, massive monetary inflation and incessant market backstopping have desensitized and anesthetized. Rational thought ultimately succumbed to "perpetual money machine" quackery. And now all of this greatly increases vulnerability to destabilizing market dislocations, as senses are restored and nerves awakened. "A lot of this looks like late 2007 or early 2008," warns one manager, but today, market mispricing is systemic and global – virtually all securities classes at home and abroad.

At the moment, the strength of the USD correlates very strongly to equities. When King Dollar is torpedoed like it was yesterday, stocks plummet. So does this mean that a rate hike next week will be tremendously bullish for stocks?

After yesterday's rollercoaster session in both the S&P and in oil, where initially stocks soared alongside oil, only to promptly tumble as stops were taken out and as the refiners' inventory strategy was exposed after the DOE's latest weekly numbers were released, it has been a quieter session so far, though maybe not for China where stocks jumped at the open only to fizzle and close at the lows in what appears to be ever less intervention by the market manipulating "National Team."