07 April 2015

    A market unleashed

    Uncertainty over the timing of interest rate rises by the US Fed is causing market confusion

    I love nothing more than throwing the ball for my dog and watching her run for it, legs scrabbling, hair billowing, tongue lolling from her mouth, unfettered by leash or physical boundaries. While I would never laugh out loud, her ball chasing is particularly amusing when she is due for a groom and the wind doesn't quite part her hair enough for her to get a good fix on the ball. Then she charges, stops, looks this way and that, charges forward again with real purpose ... only she hasn't realised that she is still 20 metres away from her target.

    I think I've just described world share markets over the past three months! It has been exhilarating to watch them and sometimes the ball-catching prowess (or share price performance) has been stellar indeed. But the market definitely needs some help because for all its boisterous enthusiasm, the balls are being thrown all over the place and the big throw, the one markets are really waiting for - rising US Federal Reserve interest rates - is just not coming.

    Honestly, markets have been just like my dog - running hard in the direction they think the "ball" will go, then retracing their steps when they realise the ball hasn't been thrown yet. It has been a bit ridiculous frankly, reading headlines explaining each day's market movements with reference to something the Fed said or inferred.

    The biggest signal during March was the removal of the reference to the word "patience" by Janet Yellen, chair of the Federal Reserve. Just to recap, for most of last year, Fed statements said interest rates would stay low for "a considerable time" after quantitative easing had come to an end. In December, the language was swapped out; "considerable time" was replaced with a pledge to be "patient" in raising interest rates, and that was further defined as a "couple of meetings" or two months. So most market watchers assumed that come February/March, the word patient would go, and the gradual rise in US interest rates (which remember, are not a bad thing in their own right) would begin.

    Imagine the market's confusion therefore when Yellen said last month that a rate rise "could be warranted at any meeting" and that any future decision would be based on economic data? Hang on, how do we read that, where do we run, where is the ball going to land? What the Fed's congressional testimony basically means is that their target interest rate will be held at 0-0.25%. While they plot their next move - and we will hear about that move along with everyone else - they will monitor inflation, jobs, global growth and financial markets, and keep a very close eye on the two things they are supposed to be managing - inflation and employment. They probably won't lift interest rates in April, but they might. In April, they will come out with another opinion and it could well be different from how they are feeling today. And they could introduce yet another phrase that the market will interpret, and reinterpret and run off to chase.

    Whether US interest rates rise or not isn't that important in the scheme of things. What does matter is that they are right for the conditions at hand. If they are increased too soon, then the burgeoning economic growth, consumer confidence and business certainty could be snuffed out and nobody in the world wants that. It is a fine balancing act and I guess to some extent, it is understandable that without any other major distractions (positive or negative), markets are focused unreasonably on every Fed move.

    But you know, even if I intended to throw the ball twenty metres to the North-West, and I yelled loudly "the ball's over there!" the dog wouldn't get it, would she?