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On October 30, the BOJ was widely expected to do something and disappointed markets by doing nothing.
Then, on December 3, the ECB had pushed markets into a rabid, EURUSD-shorting frenzy only to dramatically disappoint by doing the barest of minimums compared to the historic pre-jawboning by Draghi and company.
Today, according to the market there is nearly a ~80% probability that the Fed will announce the first rate hike, precisely 7 years to the day after it cut rates to zero.
But can it too disappoint, either by not being dovish enough in its language, or by actually not following through with the most telegraphed rate hike in Fed history?
According to ScGen, the Fed is widely expected to start tightening policy on Wednesday and adds that “after the BoJ and ECB, we see a risk that the market will be wrong-footed for a third time, and that extreme positions built ahead of tightening will be reversed.“
Perhaps, we will see shortly, although when everyone is on the same side of the boat, we agree that the temptation to “sell the news” will be huge, a temptation which could manifest itself most directly an unwind of an unprecedented amount of USD longs.
Here is what else SocGen believes:
Finally, and most importantly, for US capital markets, this is what SocGen thinks are the most vulnerable US assets:
High yield and small caps: casualties of Fed tightening – steer clear. Ahead of Fed tightening, we have steered clear of illiquid assets, such as US HY (zero exposure in our MAP allocation) and small caps. Stress has increased already in the HY market, with spread widening and increased implied probability of default in a wide array of sectors (not only oil). In particular, we are short US small cap equities vs large via being short Russell 2000 vs S&P 500. Small caps have done very well in the last few years relative to large caps, supported by abundant global liquidity, quantitative easing and the flight to equities as fixed income yields fell. But small caps are now more expensive than large caps in P/E terms, and structurally more volatile. As the Fed tightens and the market enters into a lower-liquidity environment (and higher-volatility regime), we think the premium on small caps is no longer justified. Going forward, we prefer to gear exposure to the global growth outlook vs US domestic growth (already at 65% of its current economic cycle). That relative value within the US equity market is also a hedge against risk-off periods and offers protection in a multi-asset portfolio.