If today’s epic squeeze higher in equities says anything, it’s that bad news is great for risk assets with the traders brushing off data in the belief that stimulus will not be cut. ....

1. Bad News is Now Great News For Risk Assets
If today’s epic squeeze higher in equities says anything, it’s that bad news is great for risk assets with the traders brushing off data in the belief that stimulus will not be cut. This theory is further supported by recent losses in the dollar and U.S. treasuries. The safety bid has lost its charm after equity markets rebounded from a sharp pullback in momentum higher. Gold is slinking around 2-week lows while crude oil is in a steady consolidation pattern. Treasury yields are moving the same direction as equity valuations while the dollar remains cautiously optimistic, poised for a rebound, yet ready to nevertheless for the possibility that easing will be back on the table after tomorrow’ meeting.
There is much speculation surrounding the Federal Reserve and tomorrow’s FOMC Statement. It is fair to say that insights as to the future of policy are very unclear with Fed members finding no clear consensus in commentary. Recent economic news has proved a mixed bag, with employment improving while business investment and inflation are slipping, adding to the confusion and muddling the outlook. The market seems split between two distinct camps, “lower for longer” and “sooner but slower” with each option posing a different set of implications. The first camp believes that stimulus is unlikely to end with the Fed extending support measures via asset purchases. When inflation is closer to the 2% target and the Fed can be assured of no contagion from Europe and emerging markets, this will spell the end of easing and onset of higher interest rates. Sooner but slower implies stimulus will be ending with rates to rise sooner than those standing in the first camp would believe. However, the rate of increases will be slow to maintain a semblance of accommodation.
The likely outcome of tomorrow’s meeting is no change in policy and no further tapering of asset purchases until after the mid-term elections at the earliest. The Federal Reserve, despite its stated goals of being independent of politics, is still a useful political tool. The last few weeks have been a test for what market sentiment can withstand. The fragility exposed by the latest market drop leads us to believe that the political machine would prefer to embrace money printing versus pitchforks and torches from the populace. Europe and ebola are popular excuses for not changing policies in order to better evaluate the situation, however, this seems more of a ploy to swing votes at the expense of real economic improvement. Unfortunately, the S&P 500 and Dow Jones gains are both easy and convenient rationales for incumbent politicians to sell the voting public. Moral of the story, buying bad news might be good for your health.
Any continuation of policies will see the dollar fall with gold rising and equities mindlessly

2. trending higher from renewed balance sheet expansion. Yields will rise as investors dash for trash once more, knowing that the Central Bank stimulus safety-net is still intact. An end to easing will be a boon for the dollar, but treasuries on the shorter end of the curve might see weakness from the prospect of higher interest rates sooner rather than later.
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