The Daily Update - Losing fundamentals

With central bank week in full swing we look back to our daily last week where we mentioned that our most likely scenario was for the BoJ to move to steepen the JGB curve and the Fed to remain on hold. Yesterday all eyes were on the Fed, after hearing that the BoJ had launched “QQE with Yield Curve Control”, or Quantitative and Qualitative Monetary Easing with 10-year yield control at 0%; intended to steepen the curve. Also as expected, the Fed maintained status quo; leaving a hike in December on the table.

This time round, there were 3 FOMC dissenters, Kansas’ George, Cleveland's Mester and Boston's Rosengren (a dove turned hawk); Fed Chair Yellen, said the FOMC members “struggled mightily with trying to understand one another’s point of view”. Adding however that “most participants do expect that one increase...will be appropriate this year” and that the issue is about timing rather than hiking; market odds for a hike in December rose marginally after the announcement to 61.2%. Median forward guidance shows the Fed is looking at one less hike next year, revised to two rate rises.

US employment appears robust and August’s inflation numbers surprised on the upside, although retail sales did retreat. So some might say that the case for a 25bp hike has strengthened, but it appears that as much as the Fed may wish to tighten it is concerned with the eventual global market turmoil; as markets continue to cling onto central bank mutterings and have thrown fundamentals out the window. We have seen demonstrations of this all month as Fed speakers have opined differing views and asset markets have swung. We also have the market's overreaction since the Fed announcement yesterday; the S&P bounced over 1% into the close, the dollar and US Treasury yields fell and gold witnessed its strongest rally in a fortnight. The FOMC committee continues to indicate a “gradual” path to tightening and this is exactly what they are doing, surely 25bps of tightening a year IS gradual.

Holdings across our portfolios have benefited from risk-on sentiment, especially at the long-end of the spectrum. Qatar sovereign 6.4% 2040s bounced two points just short of all-time highs. The holding continues to offer very attractive risk-adjusted return and yield of ~17% with a comfortable 4 notch credit cushion, according to our proprietary Relative Value Model the bond could still rally another 20 points to reach fair value. State-owned Saudi Electricity (SECO) also enjoyed a 1 point gain, its yield tightening 15bps to a still attractive 5.05%.