Rate Hike Anticipation and Angst And What To Really Watch For

Currently the entire global financial system is waiting for the resulting votes from the Federal Reserve’s FOMC meeting. It is anticipated that the Board will indeed raise rates for the first time in nearly a decade. The angst is clearly palpable; except for nearly all the next in rotation fund managers I’ve seen paraded across financial media this morning. From what I listened to this morning, as long as it’s your money at risk “there’s nothing to worry about” because their money (as in their year-end bonus and or fees collected) is all but assured. After all, “Just look at the market’s reaction going into this hike. It’s a vote of confidence from the markets. And if the markets are confident, so too should you.” (i.e., Please don’t panic or sell. We need your commissions or we’ll starve.) This has basically been the tenor and tone this A.M.

I received some inquiries from friends and others the other day on just what I would be looking or listening for when the announcement is made, and the subsequent press conference. I thought I’d post those thoughts here for readers who may want to know also. For this meeting has far more implications to both business as well as personal finances than probably any since those held during the tempest days during the financial crisis. Here’s what I said…

What ever the market is doing, as well as done these last few days should be ignored. By ignored I mean: as trying to figure out how the markets “feel” or “think” about the upcoming announcement. None of it is relative. It’s all superfluous in regards to a hike or not. It has everything to do about what’s known as “OPEX.” e.g., options expiry into a year-end closing cycle. This is what is currently moving the markets around. And the ability to move this market up or down today (and I do mean today) is the fact there’s basically no one in the markets trading other than those who have positions on that need to either protect that position, or close it out. The volumes show it. Everyone is basically either out of the market, or sitting on the sidelines awaiting the news. Let me give you an example.

I have read on many a trading site that they have actually either, 1) closed their books as of last Friday and decided to take the rest of the year off. Or, 2) Completely have gone to cash and will not enter any new position till probably next Monday, if then. With the stated possibility they too might also just end the year as of last Friday.

I must remind you that these are sites that are owned by well honed traders. Traders that traded before, as well as during the financial crisis and since. Yet, this time? They have gone to the sidelines (some for the first time ever in their trading careers) for they have no idea what may or may not transpire. That should tell you something in just how manipulated as well as adulterated these markets have now become. Yes, they could be getting exceedingly wealthy if things went the way they believe they could. However, they could also get wiped out for reasons they just could not anticipate. And this time – they’re taking no chances. (these are traders with 7 and 8+ figures worth of capital at risk at any given time, so it’s not like they’re some lowly self-directed retirement fund operators)

When the markets are this thin – prices can move around like a paper cup in the wind. Up moves of 1%+ or down are the norm as strike prices get pinned and exercised. No matter what the Fed. announces may or may not have any effect which way the market will move at first blush. They could raise and we plummet. They could hold and we plummet. They can be hawkish and state dovish tones at the press conference and we plummet. Or, with all the same statements – we could rocket to new highs. It all depends on what, and where, the markets want to clear out their year-end expiry’s at. Yet, that will happen quickly. And won’t last for more than maybe 24hrs or so. The real tell on just how affected the markets are comes on Thursday and Friday in my view. And here’s what really matters. Remember these 2 things.  (IOER) Interest On Excess Reserves, and (RRP) Reverse Repo Rates. (For an explanation of exactly how these are supposed to function here’s a the Fed’s research note)

Basically this is where the Fed. will have to be hands on in exactly how much their move of interest rates affects the underlying market structure. This is where what is known as “Money Market Funds” live. And the Fed. has never had to deal with the implications of a rate hike in this very important area since the financial crisis.

Do not let this point be lost on you for it is paramount in my estimation: It’s one thing for your stock value to “lose a buck or two.” That’s your problem as far as the Fed’s concerned. However – If the money markets “break the buck?” Not only is that the Fed’s problem. It could be the start of a contagious global market problem. So this is the area that needs to be watched going into the weekend. For if there’s trouble there – there’s trouble everywhere. (For a good quick breakdown of the mechanics ZH has a great article you can find here.

So, with that all said there’s really nothing more that can be said or done except “we just have to wait till the dust clears” to see just how much of a dust-up this hike (if we do in fact get it) does to the overall market picture. For right now. It really is anyone’s guess.

But that guessing game will end shortly and far more truth’s will be illuminated. For just as that other saying goes. “If there’s one cockroach…”

© 2015 Mark St.Cyr