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16 Sep 2013
Status of the risk trade depends only partially on Fed Head replacement
FXstreet.com (Barcelona) - Bernanke’s replacement will be big for risk assets’ direction to be sure, but other factors matter as well.
Fed Head choice just one of several determinants of the status of the risk trade
As the S&P futures threaten a breakout above the 8/1 – 8/2 high of 1,698.50, global traders and investors are asking themselves whether to chase this rally in risk or fade it. Analysts from around the world have already weighed in with opinions – including PIMCO’s Bill Gross who noted that the withdrawal of Larry Summers’ withdrawal from consideration as the potential replacement for Ben Bernanke was a win for risk assets. Gross shared his thoughts via Twitter: "Summers's exit makes Monday a huge day for curve/risk on trades. Treasury 5/30 curve may steepen by 10. Stocks should do very well."
Another analyst, Greg Gibbs, FX Strategist at RBS, said, "This is a significant development at a sensitive time for the market ahead of the 18 September FOMC meeting. Summers had spoken sceptically of the efficacy of quantitative policy. And as an outsider from the Fed, he has little personal attachment to the policy.” Gibbs goes on to speak about one of the possible front-runners, Janet Yellen, “Yellen is the polar opposite. She has been a key lieutenant of Fed Chairman Bernanke and a key supporter of QE. She has frequently defended it, claiming it to have effectively contributed to easier policy and faster economic growth with few negative side-effects or risks. She is viewed as more willing than most to prolong the policy or ramping it up again in the future.”
What Yellen’s choice as Bernanke’s successor, if it happens, means for risk assets is that the Tepper Trade (made famous by David Tepper of Appaloosa Management) may remain “on”. That is where risk assets rally on bad news because the Fed is there as a backstop and they rally on good news because things are getting better. Either way, risk assets rally.
However, what if Yellen is not the choice? What if Donald Kohn is the choice instead? Mr. Kohn’s name was recently mentioned by President Obama as another strong candidate to go along with Yellen. Kohn would likely be an easier nominee to get through the confirmation process as he was a George W. Bush appointee while Yellen was appointed by Obama. Kohn is known as being more conservative on the Fed’s QE policies – and bordering on hawkish.
It is fair to say that if Donald Kohn’s name is called instead of Yellen’s that this euphoric rally in risk assets (stock futures, the euro, the Aussie Dollar and Canadian Dollar just to name a few) will reverse course rather quickly. With elections coming up next year, will Obama do anything to upset the rally in stocks? Deep down he probably hates the idea of stocks rallying while the US economy struggles to get out of first gear. But, he is a skilled politician and would likely hate even worse losing the edge in Congress due to the stock market tumbling due to his choice of an appointee.
So, the “risk on” trade will certainly catch a tailwind if Yellen is named and get kicked in the gut if Kohn is named. Remember, though, the market still has to deal with the Fed’s tapering decision / announcement this week as well as the looming battle over the US budget. Other global factors affecting the risk trade will be the ability of China to continue to report good numbers on the economic front and Europe’s ability to maintain their modest recovery. There is plenty of data on the latter due out this week.
Fed Head choice just one of several determinants of the status of the risk trade
As the S&P futures threaten a breakout above the 8/1 – 8/2 high of 1,698.50, global traders and investors are asking themselves whether to chase this rally in risk or fade it. Analysts from around the world have already weighed in with opinions – including PIMCO’s Bill Gross who noted that the withdrawal of Larry Summers’ withdrawal from consideration as the potential replacement for Ben Bernanke was a win for risk assets. Gross shared his thoughts via Twitter: "Summers's exit makes Monday a huge day for curve/risk on trades. Treasury 5/30 curve may steepen by 10. Stocks should do very well."
Another analyst, Greg Gibbs, FX Strategist at RBS, said, "This is a significant development at a sensitive time for the market ahead of the 18 September FOMC meeting. Summers had spoken sceptically of the efficacy of quantitative policy. And as an outsider from the Fed, he has little personal attachment to the policy.” Gibbs goes on to speak about one of the possible front-runners, Janet Yellen, “Yellen is the polar opposite. She has been a key lieutenant of Fed Chairman Bernanke and a key supporter of QE. She has frequently defended it, claiming it to have effectively contributed to easier policy and faster economic growth with few negative side-effects or risks. She is viewed as more willing than most to prolong the policy or ramping it up again in the future.”
What Yellen’s choice as Bernanke’s successor, if it happens, means for risk assets is that the Tepper Trade (made famous by David Tepper of Appaloosa Management) may remain “on”. That is where risk assets rally on bad news because the Fed is there as a backstop and they rally on good news because things are getting better. Either way, risk assets rally.
However, what if Yellen is not the choice? What if Donald Kohn is the choice instead? Mr. Kohn’s name was recently mentioned by President Obama as another strong candidate to go along with Yellen. Kohn would likely be an easier nominee to get through the confirmation process as he was a George W. Bush appointee while Yellen was appointed by Obama. Kohn is known as being more conservative on the Fed’s QE policies – and bordering on hawkish.
It is fair to say that if Donald Kohn’s name is called instead of Yellen’s that this euphoric rally in risk assets (stock futures, the euro, the Aussie Dollar and Canadian Dollar just to name a few) will reverse course rather quickly. With elections coming up next year, will Obama do anything to upset the rally in stocks? Deep down he probably hates the idea of stocks rallying while the US economy struggles to get out of first gear. But, he is a skilled politician and would likely hate even worse losing the edge in Congress due to the stock market tumbling due to his choice of an appointee.
So, the “risk on” trade will certainly catch a tailwind if Yellen is named and get kicked in the gut if Kohn is named. Remember, though, the market still has to deal with the Fed’s tapering decision / announcement this week as well as the looming battle over the US budget. Other global factors affecting the risk trade will be the ability of China to continue to report good numbers on the economic front and Europe’s ability to maintain their modest recovery. There is plenty of data on the latter due out this week.