FOMC BLINKS (as predicted), VW and Glencore in trouble, Aussie data shocker but cause to Turnbull-ish ?

We wrote at length about risk markets and the dangers ahead in our August monthly. September provided continued volatility, not helped by a confused US Federal Reserve (FED) who passed on hiking rates despite talking of such an occurrence all year.  This did not come as a surprise to us, as the FED is market dependent, not data dependent, as they would have us believe.

The FED say they are not influenced by the stock market. However, when QE1 ended the stock market dropped 20% and the FED caved and gave us QE2. It ended and the stock market dropped 19% and they gave us Operation Twist. They talked of ending Twist and we had taper tantrum in May 2013 and so they extended it. Now as QE3 has ended markets are again falling and they have told us they want to raise rates. Markets have fallen and they didn’t raise rates. Is there a tradeable pattern of a Quantitative Easing cycle developing?

We do not expect the FED to raise rates in 2015.  We absolutely acknowledge they would like to raise rates but ultimately the markets will not allow under that.

If markets were not confused enough, the troubles at VW and Glencore only heightened the sense of fear. It has been sometime since we have experienced a large corporate failure with potentially systemic consequences. Both these situations require careful attention, VW as one of Europe’s largest employers and Glencore as global commodities giant with huge involvement in commodity trading and derivatives businesses. We discussed widening credit spreads in our August monthly – these issues will only add fuel to the credit spread widening fire.

Turning to Australia the data early in September proved quite sobering, with GDP printing a mere 0.2% (would have been negative if not for defence spending) and retail sales -0.1%. With the AUD at 70 cents, Australian's should be shopping on the high street rather than online, and yet that retail sales kicker is not forth coming. Employment remained stable but doesn’t show any material signs of improving.  We remain concerned that the Australian economy is operating below long run average and further stimulus will ultimately be required.  We had always assumed that the FED would pass in September, thereby opening the RBA to a rate cut in November to provide that stimulus, but we are pushing back on that now.

The election of Malcolm Turnbull as Prime Minister is significant and will generate a much needed boost to confidence. We believe the RBA will now wait to see if a) Turnbull can clear the Senate in any meaningful way and b) if the lift in confidence generates increased CAPEX intentions. We remain sceptical of both but time is required to answer those questions. We are moving back our rate cut estimation to February 2016 as a result.

FUND HIGHLIGHTS & POSITIONING

JAMIESON COOTE BONDS ACTIVE FUND GAINED 0.58% GROSS DURING SEPTEMBER.

Coming out of a hugely turbulent August we had a defined strategy into the key September US Federal Reserve meeting on Sept 17th where over 80% of economists expected a rate hike.  We reduced risk, closing curve exposures and running less duration at 4 years for the first half of the month.  Whilst we were confident the FOMC would pass, our call was non consensus and required investment caution. We added duration within seconds of the decision and added further duration during the dovish press conference taking the funds duration above index up to 6.1 years. The market rallied strongly in the following few days and we started lightening risk into the rally, locking in gains and returning the fund to a more balanced position into quarter end at 4.2 years duration.  We continue to expect volatile markets ahead into the fourth quarter and believe lighter risk is appropriate, looking to capture opportunities as they arise. We remain sympathetic to curve flattening views given the drop in US break evens and the inability of oil to materially rally. We will use any significant steepening of the curve to add flattening exposure.