The Fed Blinks
Fed admits China/Wall St threatens to reverse Main St recovery; Fed confirming “deflationary recovery” (Chart 1); risk can rally but sell into strength; upside for risk assets constrained by growth outlook, downside protected by Fed.
Fragile Wall Street + perilous China = “tactical delay” in Fed hike according to our economists; BofAML say Dec hike likely; but if no autumn risk rally despite ultra-dovish Fed & bearish sentiment = markets hinting “recession” and/or “default” imminent.
Short-term tactics: negative for US$, banks. EM>DM, resources>banks, gold>US$, REITs>cash, growth>value decent tactical trades.
Deflationary recovery means “growth”, “yield”, “quality” remain structurally bid; we stay long US$, volatility, real estate & stocks>bonds; but SPX>2040-2070, GT30>3.2%, DXY>97 needs stronger global growth in Q4.
Bearish risk = deflationary bust: Asia banks indicate crisis; Q3 EPS recession. FMS says Discretionary, Banks, Tech & Eurozone most at risk should peak liquidity coincide with EPS recession…SPX<1870, GT30<2.8%, DXY<93...at least until new extreme policies introduced (Fed QE4, China QE1 or a G7 shift toward fiscal policy stimulus).