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After The BOJ And ECB, Will Yellen Disappoint Next? SocGen Warns There Is "Risk The Market Will Be Wrong-Footed"

Tyler Durden's picture




 

On October 30, the BOJ was widely expected to do something and disappointed markets by doing nothing.

Then, on December 3, the ECB had pushed markets into a rabid, EURUSD-shorting frenzy only to dramatically disappoint by doing the barest of minimums compared to the historic pre-jawboning by Draghi and company.

Today, according to the market there is nearly a ~80% probability that the Fed will announce the first rate hike, precisely 7 years to the day after it cut rates to zero.

But can it too disappoint, either by not being dovish enough in its language, or by actually not following through with the most telegraphed rate hike in Fed history?

According to ScGen, the Fed is widely expected to start tightening policy on Wednesday and adds that "after the BoJ and ECB, we see a risk that the market will be wrong-footed for a third time, and that extreme positions built ahead of tightening will be reversed."

Perhaps, we will see shortly, although when everyone is on the same side of the boat, we agree that the temptation to "sell the news" will be huge, a temptation which could manifest itself most directly an unwind of an unprecedented amount of USD longs.

Here is what else SocGen believes:

  • US assets tired: Fed liftoff, the first step to the next recession (H2 18). The US economy has behaved as expected in recent months and looks strong enough for the Fed to start normalising its monetary policy. We expect the tightening cycle to end by 2019, albeit at a relatively gradual pace. We think US assets are tired. We have already reduced our allocation to Treasuries to focus on European peripheral nominal bonds and US TIPS, which should benefit from inflation prints crawling higher over the coming quarters, along with sustained US GDP growth in 2016.
  • Still very large long US dollar positions ahead of Fed liftoff. However, we also think that most of the USD rally is behind us, with the Fed on the brink of effectively starting tightening but only on a very gradual glide path to normalisation. In terms of positioning, we still see very large long net positions against the EUR and against JPY in particular, even if selling pressure on these currencies eased somewhat in the last few weeks as the ECB and BoJ failed to deliver more QE. Is there a risk investors will be wrong-footed for a third time this Wednesday by the Fed?
  • A boost to oil prices while awaiting a more balanced market. We expect some relief for the commodity complex as USD strengthening has contributed to the drop in commodity prices since July 2014. In the short run, there could be a relief rally in oil in particular, with less selling pressure. In the longer run, we expect a rebalancing of supply and demand to support prices from the middle of next year.
  • Increased probability of a relief rally in EM currencies. We concentrate our EM exposure on Eastern Europe and Latam. EM currencies have been hit in recent years by a combination of Fed tightening fears, concerns about growth prospects (especially in China) and lower commodity prices. This downward trend has been exacerbated by domestic factors, such as political and governance issues (e.g. in Brazil, Russia, Turkey, South Africa). Our more constructive view on commodities, especially oil, would help support EM commodity currencies on a one-year horizon. In the shorter term, more constructive Chinese data recently and a dovish Fed stance could support a rebound. However, we think Asia remains vulnerable, as we expect the Chinese currency to continue depreciating. This would likely trigger another round of depreciation in EM Asian currencies, also increasing credit risk in the region .

Finally, and most importantly, for US capital markets, this is what SocGen thinks are the most vulnerable US assets:

High yield and small caps: casualties of Fed tightening – steer clear. Ahead of Fed tightening, we have steered clear of illiquid assets, such as US HY (zero exposure in our MAP allocation) and small caps. Stress has increased already in the HY market, with spread widening and increased implied probability of default in a wide array of sectors (not only oil). In particular, we are short US small cap equities vs large via being short Russell 2000 vs S&P 500. Small caps have done very well in the last few years relative to large caps, supported by abundant global liquidity, quantitative easing and the flight to equities as fixed income yields fell. But small caps are now more expensive than large caps in P/E terms, and structurally more volatile. As the Fed tightens and the market enters into a lower-liquidity environment (and higher-volatility regime), we think the premium on small caps is no longer justified. Going forward, we prefer to gear exposure to the global growth outlook vs US domestic growth (already at 65% of its current economic cycle). That relative value within the US equity market is also a hedge against risk-off periods and offers protection in a multi-asset portfolio.

 

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Wed, 12/16/2015 - 12:47 | 6930908 clooney_art
clooney_art's picture

The bull market is intact. Why worry unnecessarily.

As long as bullshit is alive, bulls have nothing to worry.

Wed, 12/16/2015 - 12:59 | 6930979 Bumpo
Bumpo's picture

If you don't eat your spinach, no dessert! I mean it this time!

Wed, 12/16/2015 - 13:01 | 6930988 BurningFuld
BurningFuld's picture

Could this fucking microscopic 0.25% interest rate decision be any more fucking dramatic?

Wed, 12/16/2015 - 13:06 | 6931008 DavidC
DavidC's picture

Probably, but not by much!

DavidC

Wed, 12/16/2015 - 13:55 | 6931066 Overfed
Overfed's picture

I hope she(?) does a Volcker and raises rates to 12%! C'mon Yellon like a felon! I double dog dare you.

Wed, 12/16/2015 - 13:10 | 6931027 tc06rtw
tc06rtw's picture

   
 …  There’s a simple explanation for all the turmoil:  The New York Post says the new Star Wars stinks.
 

Wed, 12/16/2015 - 13:37 | 6931138 A Nanny Moose
A Nanny Moose's picture

Never before have so many, labored so much, to produce so little.

Wed, 12/16/2015 - 13:20 | 6931070 BullyBearish
BullyBearish's picture

All this ANGST and we're still only 3.8% off the S&P All-time High!!!!

Wed, 12/16/2015 - 12:48 | 6930923 MauritiusGold
MauritiusGold's picture

There is a risk SocGen have been wrong footed....

Wed, 12/16/2015 - 12:49 | 6930926 NoDebt
NoDebt's picture

Cash: the most hated asset class in the world currently.

Wed, 12/16/2015 - 12:50 | 6930929 Hal n back
Hal n back's picture

got to love being long large caps when the GAAP PE is around 25 and growth is hard to find. In the old days the market PE would be 8. And a contractign company would  not be able to support that. What ever happened to PEG ratios?

Wed, 12/16/2015 - 12:56 | 6930961 Mini-Me
Mini-Me's picture

Sustained US GDP growth?  Are these guys smoking something?

Wed, 12/16/2015 - 12:57 | 6930972 G.O.O.D
G.O.O.D's picture

What ever happened to PEG ratios?

 

Lol you are kidding right?

 

In the land of bizzaro we have a gold silver ratio of 77. WTF Chuck?

 

It is all out the window, the rulers are discussing nuclear exchange as a viable option and YOU think the market is supposed to make sense still?

 

P L E A S E

 

 

Wed, 12/16/2015 - 12:58 | 6930973 buzzsaw99
buzzsaw99's picture

wrong. there is no market.

Wed, 12/16/2015 - 12:58 | 6930977 Elio
Elio's picture

My prediction is they will raise the rates and nothing major will happen. Big shocks in economy never happens when people expect it to happen. This kind of things only happen when they have a chance to caught people of guard when even the most bearish person on earth becomes a kind of bull.

Wed, 12/16/2015 - 13:11 | 6931035 MauritiusGold
MauritiusGold's picture

Perhaps it is accompanied with an announcement of "something else". It all seems too 'calm'. Then again calm precedes a storm.....

Wed, 12/16/2015 - 13:10 | 6930997 firstdivision
firstdivision's picture

Hard landing in China.  Check

Shrinking coporate revenue. Check

Equity valuations at iditotic multiples. Check

Moar Debt to GDP. Check

Rates at Zero. Check

 

Yep, looking like no Vol for this market once the decision comes in.  I don't see a single way they can raise rates without blowing up the entire financial system, but then again, I do use the logic portion of my brain too much.

Wed, 12/16/2015 - 13:09 | 6931010 yellensNIRPles
yellensNIRPles's picture

The folks who actually know what the fuck is going on fall into two camps:

  1. People who make money on the way up AND the way down. They are 'in-the-know' and syphoning money off the top so fast they are just loving this shit. The more volatile the markets are, the better. These are few and far between but they do exist.
  2. The folks who are smart enough to be primarily liquid since they know that they are not 'in-the-know', and who are sitting on the sidelines waiting to see what happens before they react. Low interest rates punish this crowd. Can you say NIRP?

The rest are just gambling and praying. This is where the 'blood in the streets' will come from. Anyone with money in the markets right now is going to get dry-docked (read: no lube) before they even realize they've been bent over.

Hey look, a quarter!

Wed, 12/16/2015 - 13:13 | 6931030 Jstanley011
Jstanley011's picture

Re: "In particular, we are short US small cap equities vs large via being short Russell 2000 vs S&P 500."

TF failed to bounce anywhere nearly as high as the ES or YM did after the early September downdraft.

Small business -- the engine of the middle class lifestyle in this country -- is in deep, deep trouble.

Wed, 12/16/2015 - 13:14 | 6931047 writingsonthewall
writingsonthewall's picture

ROLL UP ROLL UP - PLACE YOUR BETS PLEASE

(someone already is)

 

http://www.benzinga.com/media/cnbc/15/12/6051454/dan-nathan-sees-unusual...

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