Daily Agenda: Dissension at the Fed as Markets Remain Nervous

Markets digest mixed Fed messages; Tsipras emerges victorious in Greece; Li calls for mergers among state-owned firms.


As the dust settled after the Federal Reserve’s Thursday announcement, three hawkish voices could be heard, with FOMC member and San Francisco Fed President John Williams reiterating his view that rates should rise in 2015, and non-voting-committee member James Bullard and Jeffrey Lacker of the bank’s St. Louis and Richmond branches, respectively, arguing that current growth justifies a hike. The trio, speaking at separate events over the weekend, noted that a single 25-basis-point increase in benchmark lending rates is far from restrictive by any historical measure and that, in their view, the risks of staying too long at ultra-accommodative levels now outweigh the potential reward. Meanwhile, market analysts voiced concerns that volatility across risk assets on Thursday and Friday represented uncertainty after a failure by Fed policymakers to clearly articulate the bank’s thinking ahead of the announcement and, perhaps unintentionally, feed fears that a slowdown in emerging markets threatens growth at home. At least one observer ascribed Friday’s selloff in U.S. equities to less complex market psychology: Asbury Research strategist John Kosar noted throughout the week that unusual flows into the S&P 500 ETF SPY had made the market top-heavy in the near-term and later called Friday’s selloff to a Jenga-like reaction by short-term speculators disappointed when no rally arrived after the Fed stayed put.

Tsipras victorious in Greek election. The fifth national election in six years concluded on Sunday evening as New Democracy coalition leader Vangelis Meimarakis conceded defeat to incumbent Prime Minister Alexis Tsipras’s leftist Syriza party. After falling short of a majority in Parliament, it now falls on Tsipras to expand his coalition by incorporating more partners, after defections from within Syriza after the capitulation to creditors’ demands over the summer.

Moody’s downgrades France. Moody’s Investors Service rerated long-term French sovereign debt downward to Aa2 with a stable outlook, with the credit agency arguing that a low-growth rate and lack of political will to cut entitlements will make debt reduction more difficult. Separately, Moody’s also lowered the debt rating of Agence des Participations de l’État, the agency which oversees the French government’s holdings in nearly 70 companies and which issues bonds with federal guarantees.

Volkswagen under scrutiny. Volkswagen CEO Martin Winterkorn issued an apology Sunday after the U.S. Environmental Protection Agency announced it was bringing charges against the carmaker for allegedly falsifying emissions data. Shares of the company, which faces potential fines of up to $18 billion, fell by over 20 percent in early trading.

Insurance merger scraped after losses on explosion. Zurich Insurance Group announced on Monday that it is breaking off the $8.5 billion proposed merger with U.K.-based RSA Insurance. The termination of discussions with RSA comes as Zurich warned shareholders that it faces significant losses related to the industrial explosions at the port of Tianjin in China in August.

Chipmakers consolidate. Dialog Semiconductor, headquartered in Kircheim unter Teck, Germany, announced an agreement to acquire San Jose, California-based Atmel over the weekend in a combined stock and cash deal valued at roughly $4.6 billion. Atmel had announced that it was seeking strategic alternatives in August and had been in preliminary discussions with numerous suiters according to media reports.

Li calls for reforms among SOEs. Speaking at a seminar among policymakers on Friday sponsored by the Politburo Standing Committee, China’s Premier Li Keqiang called for increased mergers and corporate restructurings among state-owned enterprises (SOE), according to a government website. The speech follows recent comments by government leaders calling for increased efficiency and competitiveness among the nation’s leading companies.

Portfolio Perspective: The Fed Could Remain on Hold

The key takeaway from yesterday is that the seemingly perfect or near-perfect conditions the Fed seems to be waiting for are hardly likely to emerge anytime soon. The message from yesterday–especially given the underlying momentum in domestic demand growth, is that the bar is set extremely high; the backdrop will probably not get this ripe for a rates lift-off for an awfully long time.

David Rosenberg is chief economist and strategist for Gluskin Sheff+ Associates in Toronto