Brexit will force Yellen's hand on rates

Contrary to what the Street says, I believe Brexit will force Fed chief Janet Yellen’s hand to seriously consider raising rates in July.

As the dollar and yen strengthen, while sterling and euro get weaker, the Fed will need to pare back that move with a rate hike to balance capital flows out of Europe.

As pound nears $1.30 to the dollar and the euro hits $1.10, EU officials will be pleading with the Fed to raise as Mario Draghi and Co. fight to keep the continent in tact.

The fact that the US 10-year note is bumping up against all-time lows at 1.47% shows the flight of capital out of Europe, despite the German 10-year bund at -0.1%.


Please keep an eye on the European bank stocks today. This is where the next leg down will come from.

Deutsche Bank is now trading below $14 a share pre-market with both RBS and Barclays halted on 20% equity declines.

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No special effects in Fx markets

Green on the screen for equities, doesn’t have the all-clear sign for me.

Granted no chart goes in one direction for that long a time, trading can be choppy, but you must look to the forex market for directionality.

The US dollar has been sliding since the new year with little positive ticks. All the while being mauled by yuan intervention by Chinese regulators.

Dollar/yen, dollar/yuan are the key US morning pairings with dollar/euro playing a role later in the day.

That’s the driver of equities with dollar weakness pushing stocks lower and bond prices higher on safe haven bets.

US markets — being closed Monday for President’s Day — have to catch up on big moves in Asian and European stocks, but that should only sustain stocks and bonds for the morning before Fx influence kicks in.

Europe’s bank stocks are taking it on the chin again with Deutsche Bank leading the way down 4%, taking Europe bourses lower.

Yellen behind center, but can't hike it

We get the rate decision in a few hours from the FOMC, and the dollar has reversed yesterday’s selling, which pushed equities up late in the day.

Since January, I have said we will not have a change in rates this year and nothing I see will change that prediction. There is too little economic grow and certainly no inflation — excluding asset bubbles created by the Fed’s policy — in the US.

The better option, but one I don’t think the Fed can take is to begin selling off some the Treasuries it holds on its balance sheet to the tune of 4+ trillion in holdings.

The reason I say it can’t do that is because the lowering the price on the debt would impair the global banks, who have huge debt positions on their books as an asset propping up their balance sheets.

Come 2pm here in the eastern time zone in the US, the statement will say no rise, but the Fed sees the possibility of a Dec rate rise, or better yet, it will hold a press conference after the October meeting to have the ability to raise then. Not to raise then, but to have the market think that there is a chance of a raise.

The one outlier is raising rates by 0.1% as a symbol of recovery. It’s a fool’s move, but it keeps the confidence game going.

How "patient" is Yellen?

Rioting at the ECB’s new Frankfurt headquarters broke out Wednesday morning. I’m not surprised.

The Federal Reserve will conclude its two-day meeting this afternoon and will release its statement at 2pm EDT Wednesday.

Yellen and company are teetering on the edge of the knife.

If the Fed leaves the word “patient” in its statement — meaning the Fed does not see a rate rise by June — then dollar/euro should move to parity sometime this week.

The alternative would be to remove the word but to say the Fed is “data dependent” and will access the rate rise at its next meeting.

The Fed will have to walk back very strongly a June date on the rate rise despite the patient phrasing.

Here’s the razors edge. Yellen & Co. needs to weaken the dollar, without raising rates. It’s very difficult to accomplish both in this economic environment.

The dollar — playing the cleanest dirty shirt in the pile — is causing the sturm und drang as imports rise and the buying power of the euro shrinks.

That in turn is creating the rioting outside of the Frankfurt HQ.

Let’s see how Ms. Yellen handles today’s announcement.

Markets hold no currency

Currency wars are upon us.

Jim Rickards in his book “Currency Wars” explains the current state of affairs. As sovereign debt levels explode in the foolish attempt to spur growth, the only tool left in the central banks hand is to devalue its currency, to stave off recession.

This leads to the phenomenon of “Beggar Thy Neighbors,” which I have spoken about prior.

Greece, Italy and Spain do not have this tool, but certainly could use it.

As the ECB begins its EQE (European Quantitative Easing) we see the euro at $1.13 where 6 months ago it was $1.28. The Japanese yen values continues to drive US equity prices, as it is the carry-trade darling. Borrow in yen to buy US stocks is the cheapest trade until it’s not.

Wednesday’s 185 point cratering on the Dow is a prime example of an unwinding of the trade off of the Fed’s continuing “patience” stance.

And while stocks fluctuate wildly in this environment, sovereign bond yields stay artificially low, since the adults in the room (bond traders) understand the global recession we are currently in.

This currency war will keep Yellen and company from doing anything with rates for 2015. ZIRP (zero interest rate policy) will be with us for the entire year and probably longer.