There is exactly 1 month until the Fed's December announcement at which at least practically every single economist (or 92% of them [6]) are convinced the Fed will hike rates by 25 bps (keep in mind that over 90% of economists predicted in January that the Fed would hike by September at the latest).
What happens if they are right? Well, perhaps nothing - after all the entire Fed move and then some, is already priced in.
According to the latest Fund Manager Survey (FMS) by BofA, it may not be 92%, but at least 81% of active money managers expect the Fed to hike in December. ...up from 47% last month as growth expectations bounce (in China to 15-month highs) and perceptions of market liquidity rise from 3-year lows.
What that means is that everyone is also long the dollar, and that even the smallest disappointment by Yellen will result in an epic dump in the USD. Here is how BofA puts it:
The Big November FMS takeaway is that the most vulnerable tactical trade heading into Dec Fed hike is "long dollar", and associated positioning, i.e. long discretionary, Eurozone, banks, Japan, and short EM, resources, commodities.
Exhibit 2 shows that “long USD” is the most crowded trade by far (32%), followed by the related trades of “short commodity stocks” (15%) and “short EM equities” (15%)
[7]
It's not just the US Dollar. According to the FMS, the other biggest consensus trade right now is long US stocks vs the rest of the world. In fact, according to BofA, we now have the "largest ever US equity "overvaluation" versus RoW (Eurozone/UK/Japan/EM). Current differential is 96ppt."
[8]
And yet, there are those who are only paid if they allocate (other people's) cash into US stocks. So here is the latest breakdown of the most overowned and underowned sectors. If the Fed does indeed surprise the market, not only will it slam the USD, not only will it send US equities (vs all other markets) reeling, but within the US market, the consensus trades will be promptly unwound. Which means the Contrarian play is to go long EM, energy materials, commodities & utilities, while shorting discretionary, banks and real estate and the Eurozone.
[8]
Finally, here is how BofA' Michael Hartnett, easily one of the handful of people worth listening to at the bailed out bank, summarized it:
We are sellers of risk SPX 2050-2100, DXY>100. Terror/geopolitics can keep ZIRP for longer, but bullish FMS indicates big EPS needed for sustained new risk highs.
That, or just pray to Saint Janet that this time there will be no surprises.
