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A world of fear lands on Janet Yellen's desk

Maybe it’s time again for investors to list a “hierarchy of fears.”

This is how therapists start treating post-traumatic stress disorder, by ranking the most-scary things that haunt a sufferer.

With possible Grexit on hold, sapped of its ability to frighten for the moment, the list of fearsome forces looks something like this:

-China’s caustic stock market is looking just about “unriggable” by the government there.

-Commodities and related emerging-markets stocks and currencies are caught in a sloppy liquidation.

-Junk bonds are getting roughed up pretty badly, in a typical sign of building credit stress, at least in the dicier pockets of the market.

-The U.S. stock market itself has been misfiring noisily, with a now widely noticed weakness in the broad majority of stocks no longer obscured by the handful of growth-stock darlings and levitating bank shares.

Where all these global concerns meet, I’d argue, is at the Federal Reserve committee room in Washington.

This is not because the Fed’s zero-interest-rate stance has been the main thing supporting markets, and not because a possible quarter-point bump in overnight rates would act as much of a brake at all on the real economy.

Rather, the Fed policy makers’ intentions are both the context for all the financial-market fibrillations and will serve as the signal of whether investors’ priorities are being closely heeded.

Unbalanced global growth is the backdrop, with the U.S. consumer starting to heat up, the job market tightening and housing looking firmer, even as Europe is only now awakening and the developing world falters.

This has been feeding worries of diverging central-bank policy all year, and that’s now getting more intense as the Fed nears a possible “liftoff” in September.

And so, with the Fed set to meet Wednesday, the insatiable, selfish id of the market might want a soothing message that Chair Janet Yellen weeps over investors’ plight and will defer action for several months. But this is unlikely to happen, and traders are acting as if they know it.

On the surface, it would seem the market is most scared that the Fed will move “too soon” by starting a tightening cycle with economic growth still fragile and inflation still running quite cool.

Yet in a big-picture sense, markets might be quietly expressing worry that this end to ZIRP is occurring too late. Not that the Fed should have moved earlier – that’s not a very defensible position despite the fact that several guys who traded themselves into ten-figure fortunes - including two named  Druckenmiller and Singer - espouse it.

Rather, it could be that the circumstances of this cycle have kept the Fed at zero long enough for financial markets and the corporate economy to get pretty far along – high equity valuations, lots of credit creation, much financial engineering already done - before short-term rates have responded.

It would be strange if investors took the first start of a tightening cycle in 11 years in perfect stride. So likely we’re seeing the anticipatory uncertainty manifest itself in unsettled markets all around.

All that said, one could argue that this preliminary selling has set markets up for at least a relief bounce if we get an as-expected, steady-as-she-goes message from Yellen.

The appearance of the Shanghai market on newspaper covers today compared to the Nasdaq crash of 2000 is also a noteworthy sign of already-panicky investor and media sentiment. All else being equal, that’s a positive in a market that’s still not far from an all-time high.

Also note that a lot of weakness has already filtered into stocks in the ragged action of the past couple of months that everyone has suddenly taken note of. So if we’re on the way to a full-on correction, much of the pressure has already been applied to many parts of the market.

That may be of slight comfort given the abundance of things to be afraid of. But even a little comfort shouldn’t be refused when things look scary.

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