This is how Jackson Hole can affect the dollar, bonds and emerging markets

Investors in Wall Street are waiting for an important gathering of prominent central bankers in Jackson Hole, Wyo., Which could impact a whole range of assets, from international stocks and bonds to emerging market assets.

The policy maker starts Thursday with a speech from Jerome Powell of the Federal Reserve at 10.00 Eastern on Friday.

This is what investors will closely monitor when the meeting is ready to start:

Read: Fed & # 39; s Powell can use the Jackson Hole speech to discuss possible problems in the future

The American dollar

Powell could point to changes in monetary policy in his speech, although market participants do not prescribe a high probability of this outcome. On the other hand, Powell could talk about persistent trade tensions, particularly between the US and China, and their possible impact on the rate of interest rate hikes, which he has previously responded to.

"We think [Jackson Hole] is relevant in the context of extreme sentiments and positioning in favor of the dollar, "wrote Mark McCormick, North American head of the FX strategy at TD Securities." That creates asymmetric risks for the dollar, because signs prudence to strengthen a short position of a positioning squeeze. "

The Fed is expected to raise interest rates in September for the eighth time since the end of 2015, with fed-fund futures indicating a probability factor of 93.6%. But a potential fourth increase in the year in December is less certain, at only 61.3%. All additional Powell guidelines on the pace of policy tightening may change the overall expectations for rate increases.

When he complicated the Fed's outlook, President Donald Trump suggested that Powell was not as stupid as he had hoped during a fund raising campaign in the Hamptons. Although the central bank is likely to ignore the criticism that monetary policy is being normalized too quickly, Trump's response increases the likelihood that the Fed will rise again in December to avoid any perceptions of political sensitivity, said Ian Lyngen, head of US rates. . strategy at BMO Capital Markets, in a note.

See: Trump raises criticism of the Fed Cop Powell rate policy: reports

Doubts about the health of the economies of emerging markets, fueled by a shift to US dollars, due to concerns about the negative effects of growing spats between the US and other trading partners, have also received attention in recent weeks. Market participants say that a stronger trend for the dollar, which has increased against currencies of emerging markets and larger economies, has made it stronger than it should be, putting it in position for a possible firm setback against rivals .

According to data from the Commodity Futures Trading Commission, the number of bullish bets of speculators outpaced the bullish bets to reach a high point from last Tuesday.

The ICE US Dollar index

DXY, -0.41%

, which measures the dollar against six rivals, increased by 1.4% in August and has increased 4.1% so far, according to facts from FactSet.

Emerging markets

The strength of the dollar has been at the expense of emerging market assets. A stronger dollar has meant that emerging countries with heavy gambling in dollars are faced with fiscal instability if they use local currency to meet their outstanding loan obligations. In addition, higher interest rates may make emerging market assets less attractive, compared to the risk, in comparison with other assets such as US Treasury bonds, for investors looking for returns.

If the tensions in trade are brought to the attention, EM & # 39; s may come under further pressure, which will make the dollar react higher, according to market parties.

Moreover, the settlement of the Fed's multitrillion-dollar balance, which peaked at around $ 4.5 trillion, is hugely important for emerging markets because it affects global liquidity. A tightening of the Fed's portfolio of assets might reduce the Treasury's prices and increase revenues in reverse.

Read: Investors in emerging markets are committed to tightening Fed balance

Also check out: It is not only Turkey Asia is the elephant in the room & # 39; in excessive dollar debts

"The big question for global investors is whether the Fed recognizes not only the recent market volatility, but also that its own policy signals may be partly behind the deterioration of global risk sentiment," wrote ING FX strategist Viraj Patel. "Under a Yellen Fed we were pretty sure that these market conditions would have kept the US central bank awaiting fashion, however, all eyes will be on the new Fed president Powell to see if he formally has a & # 39; America First & # 39; s monetary policy approach. & # 39;

When Powell reverses a Yellen-like angle in his commentary, EM resources can get some respite, Patel suggested.


Even if Powell does use the stage to give advice on future interest rate hikes, traders will probably see few surprises.

The strong economic background and consistent message from Powell about the need to normalize interest rates have already prompted investors to take three to four steps this year. But the almost universal market outlook that the Fed will continue to raise interest rates has not helped the bonding bears who have steadfastly expected that interest rates would hit and remain 3%.

Instead, the yield curve – the gap between short-term interest rates and longer term peers – has steadily flattened, as geopolitical unrest and the fear of a trade war have anchored outdated rates, while short returns are being pushed, with movements sensitive to the Fed's policies. , higher. The 10-year yield yielded in August

TMUBMUSD10Y, -1.45%

has slipped more than 10 basis points to 2,828% from Monday, while the two-year banknote yield

TMUBMUSD02Y, -1.27%

has fallen to 2.59%, according to data from Tradeweb. This helped to narrow the yield gap between the two maturities, one of the most popular measures for the slope of the yield curve, to 23 basis points, or 0.23 percentage points, the lowest since early August 2007.

Fixed-income investors will probably focus on the bond market's focus on the end of the Fed's balance sheet cut.

If the payment of the balance sheet is terminated faster than the investors expect, the Treasury Department does not have to increase the net issuance as much as planned. This is because with a larger balance sheet the central bank will absorb more of the supply, because the pace of the monthly reinvestments would also be higher. Dropping out of net emissions could thus be a relief for the short end of the bond market, which has steadily increased interest rates, thanks in part to a flood of this year's upswing to budget ceilings and a tax cut of more than trillion dollars.

"Should Powell suggest that a larger balance would be a reality that the committee feels comfortable with, an earlier end to SOMA disposal would be clearly interpreted as very stupid, with the most immediate takeaway of fewer Treasury bills," Lyngen said. SOMA refers to the System Open Market Account Holdings and corresponds to the Fed's total securities portfolio.

Although no seismic shifts are expected, a lack of further market engines, including profits and large data in the short term, could make the central banking convention a main attraction for Wall Street.

"So far, Powell has been more Yellen than Bernanke in terms of market jawboning, so we see the probability that paradigm-shifting comments are equally low, but present," Lyngen said.

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