Volatility

It appears that the Fed no longer cares about doing the right thing for a very simple reason - the Fed no longer is worried about losing credibility. As the following chart showing the results of a survey of 150 institutional RBS clients and investors confirms, two -thirds already believe the Fed has lost credibility.

48 hours - that's how long it took Citi's chief economist Willem Buiter to issue a report which was just as dire as Daiwa's, but because Citigroup is much more reliant on keeping it traditionally bullish clients as happy as possible, one had to read between the lines to get to the bottom line.  This is Citi's punchline: "A global recession starting in 2016, led by China is now our Global Economics team's main scenario. Uncertainty remains, but the likelihood of a timely and effective policy response seems to be diminishing."

"It looks to me a bit like a bubble again with essentially a tripling of stock prices since 2009 in just six years and at the same time people losing confidence in the valuation of the market."

The title does give it away: the only event that everyone will be focusing on this week will be the Fed's announcement and Yellen's press conference on Thursday. Here is what else is on deck.

• China stocks slide as data raises fresh economy worries (Reuters)
• Was Tom Hayes Running the Biggest Financial Conspiracy in History? (BBG)
• The Fed’s Policy Mechanics Retool for a Rise in Interest Rates (NYT)
• Germany re-imposes border controls to slow migrant arrivals (Reuters)
• Thousands flee California wildfire as homes go up in flames (Reuters)
• Bavarian minister says German border controls could last for weeks (Reuters)
• China sells record FX in August, shows pressure after devaluation (Reuters)

News That Matters

· Thursday brings the much anticipated FOMC rate decision, with analysts split in their forecasts as to whether the central bank will hike rates after recent volatility in global markets

· A number of other events take place this week including rate decisions from the BoJ and SNB as well as releases of the German ZEW survey and the latest UK inflation & employment data

To be sure, whether or not Janet Yellen has made a mistake will become all too clear over time. All one need do is observe whether EMs careen further into chaos and/or whether the PBoC becomes even more schizophrenic, but as far as what to watch in the immediate aftermath of the FOMC announcement, we return to what we noted after September’s NFP print when we quoted BofAML. To wit: “If they do hike, watch the long-end.”

"All this points to weaknesses in domestic and international policy arrangements - arrangements that have so far been unable to constrain sufficiently the build-up and unwinding of hugely damaging financial booms and busts across countries.Hence a world in which debt levels are too high, productivity growth too weak and financial risks too threatening. This is also a world in which interest rates have been extraordinarily low for exceptionally long and in which financial markets have worryingly come to depend on central banks' every word and deed, in turn complicating the needed policy normalisation. It is unrealistic and dangerous to expect that monetary policy can cure all the global economy's ills."

Saxo Bank's Chief Economist, Steen Jakobsen, says that the recent sell-off in the market has scared investors away, warning that volatility remains high as people await the Federal Reserve's decision on what to do about a rate rise. His base case is that there will be a hike next week, adding that if it doesn't happen this month, it could become too late to act.

What's India got to do with it?

Positioning across the world's most-levered financial instruments has never been this crowded. With such extreme positioning across the equity, vol, and bond complex, it would seem no matter what The Fed does in September, there will be blood.

So far, it’s a different type of crisis – market tumult in the face of global QE, in the face of ultra-low interest rates and the perception of a concerted global central bank liquidity backstop. It’s the kind of crisis that’s so far been able to achieve a decent head of steam without causing much angst. And it’s difficult to interpret this bullishly. If Brazil goes into a tailspin, it will likely pull down Latin American neighbors, along with vulnerable Indonesia, Malaysia, Turkey and others. And then a full-fledged “risk off” de-risking/de-leveraging would have far-reaching ramifications, perhaps even dislocation and a collapse of the currency peg in China. China does have a number of major trading partners in trouble. Hard for me to believe the sophisticated players aren’t planning on slashing risk.

A review of the technical condition of the dollar in the days leading up to the FOMC meeting announcement.

"A 'policy error' rate hike might well result in positive correlations among equities, commodities and bonds, due to a combination of risk off and higher rates. In this case it is not entirely clear how risk-parity funds would rebalance: A potential candidate for inflows would be currencies, and in particular the dollar. This would only put additional upward pressure on the dollar, reinforcing the “policy error” nature of the hike."