Russia Harpoons Markets, Will the Fed Save the Day?

Last night the Central Bank of Russia (CBR) decided to raise interest rates to 17%. This was an emergency measure to stabilize the value of the Ruble, the value of which was down over 19% at one point today. The gyrations are having real effects on the Russian economy, even causing Apple to halt Russian sales. The effect can be seen in the Russian stock market, which began the day declining heavily. The volatility has attracted traders to ETF’s such as RUSS, which rode a roller coaster all day today:

Direxion Russia 3x Short ETF

Direxion Russia 3x Short ETF

Volatility overseas spilled into the US markets today, with the SPY selling off and long-end treasuries rallying. S&P 500 futures attempted to rally off the cash open, but we saw a flight to quality begin midday which lasted to the close:

S&P 500 ETF

S&P 500 ETF

Long-end US Treasury ETF

Long-end US Treasury ETF

Today saw a stabilizing of oil prices however, with the USO posting its first gain in 4 trading sessions:

US Oil ETF

US Oil ETF

The falling price of energy has been a great concern for central bankers worldwide, and may influence the Fed’s decision making process for raising rates in 2015. Many Fed-watchers expect the FOMC to drop the promise to keep rates low for “a considerable time” from tomorrow’s statement. Strong employment figures from last month’s non-farm payrolls have bolstered trader’s opinions that the Fed will begin raising short term interest rates by mid-2015.

Given the Fed’s past history of pandering to the market, it will be interesting to see if they leave the language the same in tomorrows FOMC statement. Since the market currently expects a hawkish tone, leaving the statement unchanged would be bullish for US Treasuries and Eurodollars, as well as the broader equity market itself. 

NB:

We have been talking an awful lot about the carry trade. Here too. The Yen has been influential in determining the direction of the stock market and today was no different:

The Carry Trade in Action

The Carry Trade in Action

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