Investing.com | Sep 18, 2017 06:30AM ET
by Pinchas Cohen
Global equities and US futures responded positively this morning to Friday's record-setting US close.
Before the weekend, the S&P 500 Index scaled and conquered the 2,500 key-level for the first time. Haven assets fell hard in Asian trade today, on a gap, as investor optimism that the US will reach a peaceful resolution with North Korea drove sentiment.
After Japanese shares reaching their highest since early August last week, and almost the highest since August 2015 – even after a second missile invaded Japan’s airspace on Friday, in less than a month – global investors haven't been able to tap into sentiment in Tokyo, nor take advantage of stocks rendered cheaper by the lower yen since Japan's markets were closed for the country's Respect for the Aged Day holiday.
Another country exposed to North Korea’s threats is South Korea. Yet its KOSPI Index surged today, up the most since May. It seems as though local as well as global equity traders, who have long been blind to anything that can spoil the party in this cheap-money environment of QE and near-zero interest rates, want to milk the markets for all they're worth, before the party ends and central banks begin to tighten their monstrous balance sheets while normalizing interest rates.
Additional signs of what can only be considered irrational exuberance have been on display via the dichotomy between weaker readings on factory output, coupled with the second highest level of consumer confidence since December 2000. How do economists explain this near multi-decade confidence? They point to rising home prices, a healthy jobs market and stocks close to record.
We postulate that the soaring stock market is the real reason for all this buoyancy; should it fall, everything else will fizzle as well, perhaps especially the exceptional confidence.
The focus now turns to the Federal Open Market Committee policy decision on Wednesday, at 14:00 EDT. After the Fed’s detailed plan last June, which was followed by subsequent communications, it is widely expected that the benchmark rate will remain unchanged but policy makers will announce the start of the normalization of its $4.5 trillion balance sheet at the next meeting. The shrinking of the bloated balance sheet is meant to raise long-term interest rates and help the economy get back to the old normal. However, because it is consensus, volatility isn’t expected to rise.
While the Fed’s biggest obstacle to increasing interest rates has been abnormally low inflation, they may have a more complex problem ahead. Inflation may get a boost from rising energy prices and spending on rebuilding in the aftermath of the hurricanes. The Fed’s challenge would be to figure out whether the readings in upcoming months represent a trend or merely outliers. This murky picture can potentially stall policy change.
Japanese equity and currency investors may be about to experience considerable volatility, as Prime Minister Shinzo Abe considers pulling a Theresa May and holding a snap general election as early as next month. Like May, he wishes to take advantage of growing support for the way he’s handling the North Korea Crisis.
At the time of May's announcement the British pound soared, which was seen as an expression of confidence, after David Cameron resigned, leaving the nation leaderless. However, May’s gamble boomeranged when in fact she lost, rather than gained power. Keeping that in mind, the yen – and therefore the dollar - could experience significant volatility.
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