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Kinahan and Laffman: Central Banks Rule This Week

March 15, 2016

Stock market action practically ground to a halt on Monday as traders around the globe sat on the sidelines awaiting not only the results from the Federal Reserve meeting this week, but four other central bank meetings as well. As the world's advanced industrial nations tiptoe further into the realm of negative interest rates, the U.S. remains one of the most competitive markets in the world. For instance, the yield on the U.S. Treasury 10-year note is higher than all advanced nations except Australia right now. 

"The year 2016 is turning out to be the year of the central bank," says Craig Laffman, Director, Fixed Income Trading and Syndicate, TD Ameritrade.

This week, all eyes are firmly focused on Fed Chair Janet Yellen who is set to address the nation in a press conference at the conclusion of its two-day meeting at 2:00 PM ET on Wednesday, March 16. 

What can traders expect from the Fed? "The CME Group's Fed funds tool currently shows a zero percent probability the Fed will raise rates at its meeting this week," says JJ Kinahan, Chief Strategist, TD Ameritrade, who together with Laffman teamed up in a webcast Monday afternoon to discuss key market moves and the potential market impact from upcoming central bank meetings. 

"Today was like watching paint dry. It was duller than dirt heading into the Fed meeting," says Kinahan. Investors have moved to the sidelines and are bracing for some potentially big market moves ahead. 

Central Bank Watch

A lot of ripples are hitting the marketplace from central bank actions, says Laffman. Last week's European Central Bank (ECB) meeting hit the market with "a bazooka size response" to the slow growth and inflation conditions seen in the euro zone, Laffman says. The ECB moved deeper into negative interest rate territory at last week's meeting, cutting its official deposit rate to negative 0.40%. The central bank also expanded its quantitative easing program by $20 billion euro per month and broadened the universe of types of bonds that can actually be held at the ECB, he says. 

Currency markets responded quickly to the ECB's announcement. "It was one of the fastest moves I've ever seen. The euro rallied very quickly versus the U.S. dollar," Kinahan said. 

What's next?

The Bank of Japan (BOJ) is scheduled to meet Tuesday and expected to hold monetary policy steady. Also, this week, the Bank of England meets on Thursday and is expected to hold rates steady. The Norges Bank in Norway and Swiss National Bank also meet on Thursday. 

U.S. Yields Outperform

The push to negative interest rates is "still a newer experiment in a petri dish," says Laffman. One clear winner from these policies is U.S. debt, as yields in the U.S. significantly outperform countries from France to Sweden to Germany, he says. The 5-year U.S. Treasury note currently offers a 1.47% yield versus the French 5-year at -0.14%, the German 5-year at -0.27% and the Swedish 5-year at -0.04%. 

"We don't have to be math majors to understand the U.S. Treasury market is offering a tremendous pick up to where other sovereign rates offer value," says Laffman. 

Related Markets: Keep An Eye On Oil, Gold Futures

Crude oil remains an important market to watch whether or not you trade futures, says Kinahan. There has been an extremely high correlation between stocks and crude oil this year. 

Digging deeper into the relationships, "The correlation between crude oil and S&P 500 futures has been 98% but between crude oil and the cash S&P 500 index (SPX) it is only 72%," Kinahan says. "The reason is because so many of these moves happened overnight. A lot of people are frustrated by that. There has been opportunity at odd hours. If you don’t know anything about futures, you might want to learn because there has been a lot going on there," Kinahan adds. 

Something to watch: Is there a stock-oil decoupling unfolding? On Monday "we saw a 3% sell-off in oil, and S&P did not follow," Kinahan noted. 

It's Been A Roller Coaster

Investors still may be shell-shocked from the market volatility earlier this year, which took the S&P 500 down by about 10% for the year. But, more importantly, the stock market has posted a strong recovery. "People aren't taking into account that we have rallied almost 10% in a month. The Dow and S&P are now both down less than 1% on the year," Kinahan says. Financials and energy stocks have been leaders in the recovery. 

Digging deeper into the futures world, gold has posted a stunning rally since the start of 2016, with nearby Comex gold futures up over 17%. "Gold is back in business," says Kinahan. 

"Gold is perceived as a safety play," Laffman adds. "You can look at some of the moves in gold, and say maybe inflation is starting to pick up. The Fed might take some action one or two times this year. A few weeks back, there wasn't a chance of a single hike in 2016 priced into the markets," he says. 

What's Ahead From The Fed?

After this week's meeting concludes on Wednesday, upcoming Federal Open Market Committee (FOMC) meetings include: April 26-27, June 14-15, July 26-27, September 20-21, November 1-2, and December 13-14. 

"There is zero percent chance priced in that Janet Yellen takes action Wednesday. It will probably be some time before we seen an interest rate hike," Laffman says. "Get used to negative rates being in the marketplace. They may not come to the U.S. at least from a policy perspective. But, when you have central banks buying in the quantity and the force that they are you could see this expand across different areas of globe," he concluded. 

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