Waiting for Janet

Best efforts

Last week Esquire magazine published an opinion a poll which found that two thirds of Americans get angry at least once a day.  Well it serves them right: it was they who invented the call centre. The only angrier group comprises those investors who followed a certain investment bank's new-year trading recommendations.

Goldman Sachs yesterday advised customers to close out five of the six strategic trades it had proposed at the beginning of January. One of them - to buy the US dollar against the euro and the yen - would have cost -4% had it been held all the way through to yesterday. The point of this observation is not to ridicule the bank for getting it wrong. It is to highlight the impossibility of making dependable exchange rate forecasts, even when the propeller-heads making those predictions have access to the most sophisticated data and modelling systems.

The one certainty in financial markets is uncertainty, and that has been doubly true in the year to date. The yen has forged ahead despite the best efforts of the Bank of Japan to use negative interest rates to make it unattractive. Sterling has lost ground even in the face of often class-leading UK economic data.  The best result an investor can realistically expect to achieve is, by the use of hedging, to avoid buying at the top or selling at the bottom.

Rhyme nor reason

Yesterday's FX market was a case in point. Even though another broad selloff in equity markets was symptomatic of severe risk-aversion, the "risky" South African rand was the day's top-performing currency and the safe-haven Swiss franc was close behind it while the even safer-haven yen lost ground to sterling.

The latest fear to stalk investors is the ability of banks to provide the liquidity necessary for the smooth operation of financial markets. Negative and near-zero interest rates make it difficult for them to generate the profits necessary to make the capital increases demanded by regulators and to fund the massive fines levied on them from time to time.

Concerns such as this contribute to a high level of volatility that few had imagined before Christmas. They are not likely to go away any time soon.

What now for the Fed?

Janet Yellen, the Federal Reserve chairperson, will begin her biannual testimony to Congress this afternoon. Her comments will have an enormous influence on financial markets and investor sentiment.

More than a few economists believe the Fed made a mistake when it raised interest rates two months ago. Some even look for that move to be reversed in the face of the current market turmoil. Others argue that the Fed could not retain its credibility were it not to push ahead with further increases. Today's speech might not be the most important Ms Yellen has ever made but it is up there. 

And now for the bathos. UK industrial and manufacturing production data come out at half past nine.