Yesterday's financial market activity surely had members of the Fed scratching their heads, perplexed as to what their next move should be, if they move at all. As the dollar (UUP) strengthened, stocks (SPY), bonds (AGG), and commodities like oil (OIL) and gold (GLD) all declined. It is typical to see investors rotate among asset classes in order to increase, or mitigate, the risk profiles of their portfolios. This year has been an exception, as the flood of global liquidity has driven valuations higher across the board, leading to what more recently appears to be a "sell everything" or "buy everything" mentality, depending on the day of the week. Yesterday investors sold everything.
The linchpin to this market is clearly interest rates, which is why, unfortunately, the Fed remains so relevant. Based on Fed fund futures prices, the market sees a 63% probability of a rate increase…