Our market risk signals prior to the FED announcement indicated a Bullish set up into yesterday’s announcement even with a small Taper.
An opportunity we expect to continue into the New Year.
However, even we were modestly surprised by the +1.8% move in the S&P 500 as the FEDs reduction in asset purchases exceeded our worst case scenario by $5 billion and included mortgages. Apparently Market participants view the FED release as on-balance stimulative (as do we) given the increased latitude and duration for accommodative action in the new language.
Therefore we remain VERY bullish on risk assets, equities in particular, for the following reasons;
- FED language creates a LARGER backstop for risk assets as dis-inflation guidance is added and both the Employment & GDP targets were moved to allay recession fears.
- Market Risk Declines as drop in Gold/Silver reflects reduced chance of a market shock from inflation/ hyperinflation fears from a continued pace of FED asset purchases.
- First indication post 2008, that FED expects the real economy to take over reigns of asset pricing.
Alternatives managers need to move to max long net risk going into January as data is light and technicals strong through the third week of the new year.
- Macro discretionary managers stay short JPY vs. USD, NOK and KRW.
- Equity managers stay long US large cap and/ or the Japanese NKY swapped back to USD or one of the favored legs mentioned above.
Remain vigilant on market risk as incipient recovery, overheating credit markets and europe remain sources of shocks. We suggest referencing our heat map for signs of potential sell-off.