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Global Macro: Markets Hostage to the Fed

NEW YORK (TheStreet) -- Federal Reserve Chairman Ben Bernanke speaks on Wednesday, and markets are hoping to get some clarity over the longevity of U.S. monetary stimulus.

We now stand hostage to the 24-hour news cycle, which is speculating whether the Fed will tighten policy or keep it unchanged. Articles abound, and with each approaching day, assets continue to trade in tighter ranges.

The first chart below is of SPDR Barclays Capital High Yield Bond ETF (JNK) over Barclays 7-10 Year Treasury Bond Fund (IEF), which measures the relative strength of U.S. junk debt over intermediate treasuries.

As the debate about whether the Fed is close to ending quantitative easing picks up, markets have sold off high-yielding assets. When Treasury prices fall and yields rise, it diminishes the value of assets like junk debt. Similarly, high yielding dividend stocks are losing favor as fixed-income securities become more attractive with their higher coupon payments.

The chart below began a tight triangle consolidation pattern in late May that should break out when Bernanke gives clarity over the future state of quantitative easing. If he states that easing will continue, this pair will burst higher and Treasury yields will similarly contract.

The next chart is of iShares Emerging Markets Bond Fund (EMB) over Barclays 7-10 Year Treasury Bond Fund. Emerging-market assets have seen a broad selloff as volatility has rattled global markets.

The yen appreciated greatly and equities have been range-bound with a downward trend developing. All of this chaos came to fruition over a few comments from the Federal Reserve and the Bank of Japan. Their level of commitment toward an economic recovery came into question and investors fled riskier assets.

Emerging markets saw a huge price decline in equities, fixed income, and currencies. The flight may have been overblown, and as seen below, emerging-market debt is now being accumulated by value investors.

If Bernanke reiterates his commitment to keeping up the U.S. economic recovery and thus keeping policy loose, this pair should trade higher. Excess funds resulting from global monetary stimulus need somewhere to reside, and emerging markets offer an attractive home.

The final chart is of Total World Stock Index ETF (VT) over SPDR Gold Trust (GLD), which measures the relative strength of world equity markets versus gold.

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