Sunday, 13 December 2015

Fed up of hikes?

19:06 Posted by The Thalesians (@thalesians) No comments

In recent years, Christmas in London has been accompanied by the sparkling lights and loud sounds of Winter Wonderland in Hyde Park. I've never been to real German Christmas market, so for me this "faux" version is still a bit of a novelty and never fails to cheer me, even if it is somewhat hectic and busy. For markets, in the run up to Christmas, it hardly seems like a time of cheer and no amount of visiting Winter Wonderland is likely to change that. With the FOMC, likely to hike rates at their meeting this week, markets have already begun to feel jitters (although it could be argued that this is not all related to the potential Fed hike).

The question is, of course, should these jitters derail what seems like a done deal (at least if we consider markets pricing of the likelihood of hike)? I have no clue whatsoever, and do not for a moment claim any better reading of this than anyone else in the market! What I do know however, is that whenever the Fed would choose to hike, it will signal a sea change in monetary policy. For years the market has become accustomed to rates being on a downward trajectory, so whilst 25bps is hardly a massive move, it is more the signalling effect that the first hike will herald. To that end, the Fed have telegraphed the likelihood of a hike for an extended period, clearly attempting to prepare the ground. No one in the market should be "shocked" if the Fed does indeed end up hiking in December! This is in sharp contrast, to the taper tantrum of May 2013, when Bernanke mused about the likelihood of tapering QE: it caught the market totally unaware. The risk is of course, if the Fed fail to hike this time, after preparing the market so long, will the market really take it on board beforehand? Beware of the boy who cried Fed hike.. one too many times.

For systematic traders, the focus on the Fed hiking might well prove interesting, but by definition, they do not make discretionary decisions. They stick to what their model is telling them, and don't simply override it unless they have an extremely good reason for doing so. If you keep on making alterations to your model, you end up running a discretionary strategy! For systematic traders, perhaps a better question is asking, do events like FOMC on average favour their strategy or end up disadvantaging them, and is it dependant on whether the Fed hike or cut rates? Obviously, every FOMC meeting is different and to some extent you could argue this event is fairly unique, hiking from ZIRP, but if you have enough data, it should cover multiple hiking cycles. For instance, if you're strategy is skewed towards being long equities, you can show on average, that long equities positions perhaps well on FOMC days. However, this might not follow for all other types of models.

Good luck for the week, whichever way you choose to trade markets, whether it is from more of a discretionary perspective or using a systematic model. Most importantly have a very merry Christmas and a happy new year!

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our group for more details here (Thalesians calendar below)

14 Dec - London - Matthew Dixon - Machine Learning in Trading (Thalesians Xmas Dinner)
20 Jan - London - Nick Firoozye - Managing Uncertainty, Mitigating Risk


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