U.S. equity markets ended on a strong footing Tuesday as volatility continued to subside. About an hour after markets closed, the Turkish central bank hoisted an array of monetary levers helping both rally its battered lira and bolster general emerging market confidence. Seemingly it was just the tonic that global investors needed. E-Mini S&P index futures (CME:ESH14) traded at around 1787 as the cash market came to a close and by 6 p.m. EST had jumped to as high as 1801.25 to a level last seen on Friday. As President Obama gave a rousing speech to express his views on the State of the Union, Tokyo trading was in full swing. Bolstered by rampant U.S. equity prices and reassured by yet another address from a central bank under siege, Japanese investors bought stocks hand-over-fist sending the Nikkei 225 index higher by more than400-points.
But hump day is providing investors with a major speed bump before the market opens. The E-Mini contract is trading down to as low as 1772.25, almost 30-handles lower than the overnight high set just hours ago. Already on Wednesday the South African central bank has tightened interest rates to help preserve the value of the rand, but the tone is stuck in a rut.
U.S. corporations reporting so far Wednesday have offered downbeat revenue guidance for the year clashing with President Obama’s claim that the economy is in its best shape since he took office. True perhaps – yet as we all know investors discount the future as they price stocks. And in the face of growing stress for emerging markets, those with longer memories clearly feel that it is too soon to assume an all clear. Historically, tightening monetary policy often has proved the first step to admitting a loss of control. The early reaction in U.S. index futures seems to support that.
On the agenda later today is the FOMC announcement as Ben Bernanke officially hands the reins over to Janet Yellen. The market’s blind assumption, and one that we cannot argue with, is that the Fed will continue to cut back the volume of its monthly bond purchases despite emerging market turmoil. Note that in September the potential onset of Fed tapering was sufficient to cause them to wait for several months. While we doubt the Fed will pay much attention to offshore turmoil at this point (it has said that it sets policy domestically rather than internationally) it is all too aware of the ripples it can create. Should the Fed maintain its purchase amount at $75 billion per month rather than announce an additional reduction, then that might be quite positive for equities and bonds.