The Market Radar

We anticipate, monitor, and comment on market moving global economic and geopolitical issues.  No dark side brooding, no wanting the world to end, no political rants.  Traders, investors, policymakers, or market observers can’t  afford to ignore us.

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FOMC: A Big Double Cheese Non-Burger

Monetary policy history made today.

The  Federal Open Market Committee (FOMC)  confirmed it would begin its long-awaited quantitative tightening (QT).

In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.  – FOMC, September 20

They also left another rate hike on the table this year.   The average dots remained fairly constant:  2017 – 1.41 percent; 2018 – 2.04 percent;  2019 – 2.63 percent; 2020 – 2.85 percent; and Long Run – 2.78 percent.

DotPlot_Sept20

The dots imply about seven more rate hikes in this cycle.  The longer run median dot came in a bit from the last meeting (see Yellen’s comments below).

Market Reaction

The markets took it all in stride as in one big double cheese non-burger.   Just as we expected.

It may take the markets a few days to digest the FOMC actions before we get a clearer picture of the direction of the markets.

FOMC Price Move_Sept20

All other things remaining equal — and they never do – it is going to take a while for this tightening cycle to start biting.   Rates are still too low, and there is too much central bank liquidity in the system.

Just check out the bull market in almost everything since the Fed began Orwellian tightening nearly two years ago, albeit at a snail’s pace, just as they said they would.

Impact of Fed_Sep20

On the margin,  we do expect volatility to pick up a bit,  however.   QT is just another grain of sand piling up in the structured criticality paradigm of global markets that could cascade into a series of avalanches.

Time to be a tourist and not a permanent resident.

All Eyes On European Bonds

Now we turn our eyes to the European bond market bubble.

We will be posting a daily table of interest rate changes of various sovereign spreads to the German Bund.  Whoever is left holding euro-denominated bonds has to be nervous after the Fed move today.  They surely know the ECB beckons.

Who is going to buy those bonds at such low rates with growth and inflation picking up?

Bond Bubble_1_Sep19

Bond Bubble_2_Sep19

 

Prayers for those who took down the mega-long duration 100-year Austrian bonds at 2.10 percent.   A move of 100 bps will almost slice the bond price in half.  The Austria 30-year currently yields around 1.60 percent.   A great deal, no?

Will the euro be around in 10 years, much less 100 years?  We suspect many flippers in that deal gaming a short-term interest rate move.

A sign of the top?  Do you hear those bells ringing?

October Sell Off

The soon to come European bond market temper tantrum is the external shock we expect to ignite a decent sell-off in global risk markets in October.   There are other events, such as an economic or policy shock coming out of China’s 19th National Congress of the Communist Party, that can also rock the markets.

Don’t discount a potential big macro swan coming out of Washington either.

We are not looking for a bear market, but a decent size flash-type crash that may last a few days or a few weeks, which can be bought.   Everyone is waiting to pounce — until volatility spikes and fear takes over.   It should be fast and furious, especially with the rise of the buy the dipper algos and trading ‘bots.

Mr. October on deck.   Stay tuned.

Money quotes from Chair Yellen’s presser:

  • Nonetheless, our understanding of the forces driving inflation isn’t And in light of the unexpected lower inflation readings this year, the Committee is monitoring inflationdevelopments closely.
  • we continue to expect that the ongoing strength of the economy will warrant gradual increases in that rate to sustain a healthy labor market and stabilize inflation around our 2 percent longer-run objective.
  • That expectation is based on a review that the federal funds rate remains somewhat below its neutral level. That is, the level that is neither expansionary nor contractionary and keeps the economy operating on an even keel.
  • Because the neutral rate currently appears to be quite low by historical standards, the federal funds rate would not have to rise much further to get to a neutral policy stance. But because we also expect the neutral level of federal funds rate to rise somewhat over time, additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion.
  • the median estimate of the longer run normal value edged down to 2.8 percent.
  • our balance sheet will decline gradually and predictably. For October through December, the decline in our securities holdings will be capped at $6 billion per month for treasuries and $4 billions per month for agencies.
  • These caps will gradually rise over the course of the following year to maximums of $30 billion per month for treasuries and $20 billion per month for agency securities, and will remain in place through the process of normalizing the size of our balance sheet.
  • by limiting the volume of securities that private investors will have to absorb as we reduce our holdings, the caps should guard against the outsized moves in interest rates and other potential market strains.
  • changing the target range for the federal funds rate is our primary means of adjusting the stance of monetary policy.   – Chair Janet Yellen,  September 20

 

Appendix:

Here is the Addendum, from the June FOMC meeting referenced in today’s release.

Addendum to the Policy Normalization Principles and Plans

All participants agreed to augment the Committee’s Policy Normalization Principles and Plans by providing the following additional details regarding the approach the FOMC intends to use to reduce the Federal Reserve’s holdings of Treasury and agency securities once normalization of the level of the federal funds rate is well under way.1

  • The Committee intends to gradually reduce the Federal Reserve’s securities holdings by decreasing its reinvestment of the principal payments it receives from securities held in the System Open Market Account. Specifically, such payments will be reinvested only to the extent that they exceed gradually rising caps.
    • For payments of principal that the Federal Reserve receives from maturing Treasury securities, the Committee anticipates that the cap will be $6 billion per month initially and will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month.
    • For payments of principal that the Federal Reserve receives from its holdings of agency debt and mortgage-backed securities, the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.
    • The Committee also anticipates that the caps will remain in place once they reach their respective maximums so that the Federal Reserve’s securities holdings will continue to decline in a gradual and predictable manner until the Committee judges that the Federal Reserve is holding no more securities than necessary to implement monetary policy efficiently and effectively.
  • Gradually reducing the Federal Reserve’s securities holdings will result in a declining supply of reserve balances. The Committee currently anticipates reducing the quantity of reserve balances, over time, to a level appreciably below that seen in recent years but larger than before the financial crisis; the level will reflect the banking system’s demand for reserve balances and the Committee’s decisions about how to implement monetary policy most efficiently and effectively in the future. The Committee expects to learn more about the underlying demand for reserves during the process of balance sheet normalization.
  • The Committee affirms that changing the target range for the federal funds rate is its primary means of adjusting the stance of monetary policy. However, the Committee would be prepared to resume reinvestment of principal payments received on securities held by the Federal Reserve if a material deterioration in the economic outlook were to warrant a sizable reduction in the Committee’s target for the federal funds rate. Moreover, the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.

 

  1. The Committee’s Policy Normalization Principles and Plans were adopted on September 16, 2014, and are available at www.federalreserve.gov/monetarypolicy/files/FOMC_PolicyNormalization.pdf. On March 18, 2015, the Committee adopted an addendum to the Policy Normalization Principles and Plans, which is available at www.federalreserve.gov/monetarypolicy/files/FOMC_PolicyNormalization.20150318.pdf. Return to text

Last Update: June 14, 2017

 

Posted in China, Euro, Eurozone Sovereign Spreads, Fed, German Bund, Monetary Policy, Sovereign Debt | Tagged , | Leave a comment

Fed Day With Extremely Loose Financial Conditions

Today is the day,  folks.

The consensus is the Fed announces the start of quantitative tightening (QT).   History in the making.

Draining Liquidity

Though monetary tightening officially began in December 2015,  this will be the first time the Fed drains liquidity from the financial system in any meaningful amount.

That is because of the Orwellian monetary policy we have discussed in previous posts.   That is paying interest on reserves – i.e., injecting liquidity into the system through paying interest on reserves  – rather than a traditional monetary policy where open market operations remove liquidity by draining reserves to peg the Fed Funds rate.

As a result, the Fed has lost control of the financial markets, in our opinion.

Consider this.  Since the monetary tightening began:  1) the S&P500 is up almost 23 percent; 2) the 10-year T-Note is down 4.8 bps; 3) the 2-10s yield curve has flattened 46 bps; 4) Corporate credit spreads have come way in  with AAA – 12 bps, BB -97 bps, BB – 241 bps, and B -346 bps;  5) the dollar index has fallen 6.7 percent; 6) the VIX is down over 50 percent; 7) the JP Morgan sovereign bond ETF (EMB) is up almost 20 percent; 8) the emerging markets equity ETF is up over 46 percent, and 9) commodities, measured by the CRB is up only 4.79 percent.

Emerging market equities up almost 50 percent in a Fed tightening cycle?  WTF?  Aren’t they supposed to flop during a U.S. monetary contraction?

Granted the nature of capital flows to emerging markets are much different today.   We will have much more to say on the structural changes taking place in EM sometime soon.

Is a move from zero to 1 1/4 percent in policy rates with liquidity injections really a monetary tightening?   The markets seem not to think so.  What ever happened to “don’t fight the Fed”?

 

Finacial Conditions_Sep20

Given the extremely loose financial conditions,  coupled with the monumental and unprecedented task of shrinking such a large balance sheet, it is difficult to anticipate what tone the Fed will strike in their FOMC announcement later today.  We think most members realize they have blown a massive asset bubble.

Given the small window for a soft landing in the asset markets and the adverse economic consequences of a hard landing,  the Fed will be inclined to reassure the markets.  The markets are likely to focus on the dots and where they perceive the terminal rates are heading.  We suspect around 3 percent the markets get very nervous, but not there yet until inflation picks up.

The start of a $10 billion reduction in reserves may cause volatility to pick up a bit, but not crash the markets.  Moving to, say, a 10 percent reduction in the balance sheet will begin to bite hard.  Will the markets allow that?

The Fed’s Big Problem

The Fed is in an impossible situation. They need to shrink the balance sheet,  so as not to overshoot policy rates,  and remove a lot of reserves from the system, but financial markets may not allow it.   If credit and growth begins to expand rapidly and inflation picks up, they may  not have a choice, however.

They may have already crossed the Rubicon, and we never see a “normalized” Fed balance sheet.  Asset markets now rule the day and the economy, for that matter.

In addition, bull markets are fun.  Hardly anybody cares to stress test market drivers and their views because everyone is making a ton of money.   For now.

The Fed will start by trimming no more than $10 billion per month from its balance sheet, with that cap rising each quarter for a year until it hits $50 billion per month.

That should shed nearly $300 billion in bonds over the first 12 months, and nearly $500 billion over the second, according to analysts’ projections.

The main unanswered question is whether the central bank will spread its remaining monthly repurchases evenly across the spectrum of maturities, or whether it will focus on shorter-dated assets and accelerate the process.

That will affect how far long-term yields may rise as the Fed allows bonds to run off. Another wild card may be the pace at which the Fed’s mortgage-bond holdings shrinks, which depends in part on homeowners’ refinancing decisions. – Reuters

To quote Churchill,

Now, this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning. – Winston Churchill, November 10, 1942

Ironically, the inverse of the beginning of the end will most likely begin on the European continent, the genesis and original home of Churchill’s war.  That is where the big bond bubble is and the ECB is waaaaaaaaay behind the curve and in a big pickle.

Growth and inflation are picking up and interest rates are much too low.

The Euro

Why is the euro rallying?  Because it can.

The euro/dollar move is a classic case of Le Chatelier’s principle, or “The Equilibrium Law”, first introduced into economics by the great Paul Samuelson.

When any system at equilibrium is subjected to change in concentration, temperature, volume, or pressure, then the system readjusts itself to counteract (partially) the effect of the applied change and a new equilibrium is established.

In other words, whenever a system in equilibrium is disturbed the system will adjust itself in such a way that the effect of the change will be nullified.

.. It is common to take Le Chatelier’s principle to be a more general observation, roughly stated:

Any change in status quo prompts an opposing reaction in the responding system
Wikipedia

Bonds cannot or are slow to adjust to the much improved economic and inflationary conditions in Europe due to repression caused by the ECB’s asset purchases (QE).  The pressure has to be released elsewhere to maintain a general equilibrium, and the currency market has little or no government intervention and trades relatively free.  It may also be causing the euro to overshoot its equilibrium value.

European Temper Tantrum On its Way And New Divergence

Bond Bubble_1_Sep19

We expect a European bond market temper tantrum sometime soon, most likely in October, where market interest rates – those that can – will increase sharply as they worry about the ECB’s dilemma.  It should spill over into the U.S. markets, given the high comovement with the Bund and U.S. bonds,  and cause the short, sharp sell-off in risk assets we are expecting.  The sell off can be bought as interest rates will still be relatively low unless inflation really gets out of hand.

Never take Bagehot’s dictum lightly:   John Bull can stand many things, but he can not stand [negative, zero, and] two percent.   Yield and return chasers will bury the shorts in this type of financial environment.

The start of a bear market ex/ some Black Swan event?   Probably not, unless the trading ‘bots short circuit and magnify the downdraft, which is a real possibility.  We would not be trying to catch the falling knife, but given the increase in technology and the new market structure you must be quick to buy the turn.   Most sell offs have now morphed into flash crashes.

A seven to plus ten percent correction and a decent blowout in credit spreads precipitated by the  European bond market temper tantrum with the level of current valuations?   In a heartbeat.

Cash has a very high option value today, but also a high opportunity cost in this raging bull market.

Therein lies your investment dilemma. We could be wrong in our analysis and view.

However, remember these words,

“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made big money for me. It was always my sitting.” – Jesse Livermore

Time to be a tourist and take up alien residency.

Mr. October on deck.

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China’s Communist Party Structure

We noticed today  someone tweeted an old post from our blog from way back when.  It has an excellent graphic of the structure of China’s Communist Party and its leaders that were selected after the last Party Congress in 2012.

Since the once-every-five-years congress begins on October 18th and it is on our market event risk checklist,  we thought you’ would be interested in a repost of the excellent graphic.  We are expecting a decent pullback in risk assets in October.

Here is what happens at the Party Congress,

The Communist Party constitution requires the Party to hold a national congress every five years.  The most recent congress, the 18th, was held in November 2012. At each Congress, delegates elect a new Central Committee in a modestly competitive process: the Party leadership nominates approximately 10% more candidates than available positions. The current Central Committee is composed of 205 full members and 171 alternate members. They include 33 women (8.8% of the full 376-member Central Committee) and 39 ethnic minorities (10.4%). – Congressional Research Service

Since assuming power at the last Party Congress in 2012, President Xi Jinping has consolidated power and risen to one of China’s strongest leaders since Mao.

Here is Barron’s on what to expect,

With the reshuffling formally occurring in October, there is a likelihood that China curtails their lax credit policies in an effort to avoid what some believe could be an epic bubble/bust scenario,” says Ralph Drybrough, co-founder of StratiFi, a portfolio-hedging service for investment advisors.

There is no consensus on the meeting. Credit Suisse analysts, for example, are telling clients that efforts will be made to reassure investors about China’s economic and market stability.

Disagreement makes a market, of course. In anticipation of heightened turbulence, Drybrough has constructed a three-part trade that essentially entails buying volatility in China, selling volatility in the U.S. financial sector, and tamping the risk of both positions with calls on the CBOE Volatility Index, or VIX.  – Barron’s,  September 1

Bloomberg reports the Party has no stomach for market volatility before and during the party,

The China Securities Regulatory Commission has ordered local brokerages to mitigate risks and ensure stable markets before and during the Communist Party’s twice-a-decade leadership congress next month, according to people familiar with the matter. The CSRC has also banned brokerage bosses from taking holidays or leaving the country from Oct. 11 until the congress ends, the people said. The regulator didn’t immediately reply to a faxed request for comment. – Bloomberg, September 12

 

We wonder if the Party planners knew they would begin on the eve and meet through the 30th anniversary of the 1987 U.S. stock market crash?

Chinese Leaders_Sep19
We have added another chart that is more clear on the hiearchy of China’s power structure.
Chinese Hierarchy_Sep19
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COTD: China Levers Up As ROW Does Opposite

We knew that credit expansion is the mother’s milk of economic growth,  but even this chart surprised us.   The global nominal private non-financial debt level x/ China has been flat since 2008.   As in flat in nominal terms not as a percent of world GDP!

Explains the weak recovery in the U.S. and the rest of the west.

Could the data in the chart be about to change and we are in the midst of a global private credit impulse, which is driving global growth expectations higher?  Could there be a measurement problem?  We suspect much of the flat growth in private debt is a reduction in mortgage debt in the United States.

Many doubters out there.   See here and here.

Global Private non-financial debt_Sep19

Hat Tip:  Tuomas Malinen

 

 

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Global Equities: Rockin’ In The Free World

Stunning table of the year-to-date returns of country ETFs coming to us via Charlie Bilello at Pension Partners.

All the country ETFs are, should we say,  Rockin’ In The Free World, except for Russia, which has turned up and rockin’ the free world in second half of 2017,  up 10.13 percent since the end of June — as we expected.

Most all the country ETFs are getting a nice tailwind, through the translation effect, from the weaker dollar.  The trade-weighted dollar index is down almost 11 percent from its peak at the end of last year (see chart below) and the euro/dollar is up 14.17 percent YTD.

Compare the country ETFs to the U.S. S&P500 ETF (SPY) up 13.42 percent YTD, including dividends

Keep on rockin’ in the free world – Neil Young

Country_ETFs_Sep19

Dollar_Sep19

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México Fuerte!

We are with you our brothers and sisters down in OH MEXICO!  Godspeed. Viva Mexico!

 

Mexico Flag_Sep19

 

Wow!  So many natural disasters this month it’s starting to get downright biblical!

Then there is the weakening of the nation-state as we have known it as the world slouches toward Bethlehem tribalism.   Even right here in America with the rise of our identity politics.

Our concept of the nation-state did not exist in biblical times.  What the linked scripture defines as “nation” translates as ethnic groups.

The modern-day nation-state framework only began to evolve the 1500’s,  culminating in 1945 with the creation of the United Nations.

Spooky action at a distance!

 

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Week In Review – September 15

Global Stock Indices

Good week for stocks.

Major U.S. major indices closed at record highs.   Brazilian stocks at new highs as traders remain confident President Temer will implement market reforms even though he faces a second round of corruption charges, of racketeering and obstruction of justice, which were brought against him on Thursday.   Risk doesn’t seem to matter anymore.

Emerging markets all the rage this year.

The NIKKEI up on big yen sell-off and North Korean missile fatigue.

Greece continues to sell off as reports the IMF could conduct a Greek bank asset quality review as part of its third bailout review.   Last month,  Reuters reported that bad loans accounted for 50 percent of bank loan portfolios last year.

Weekly_Stocks

Global 10-year Bond Yields

Interest rates up big in the Europe and U.S. last week.

The U.K. especially hit hard as the view, expressed by a majority of the nine-member monetary policy committee (MPC) at Thursday’s meeting, that “rates could rise in the “coming months to buffer inflation risks.   U.K. inflation is expected to soon hit 3 percent, mainly the result of the crash of the sterling after the Brexit vote.

Inflation?  When was the last time inflation was on the radar in any of the G5 countries?

Even the U.S. printed a  hot CPI number on Thursday at 0.4 percent (versus 0.3 expected) increasing 1.9 percent y/y.  The core rate came in at 0.2 percent ending a five-month streak of weaker-than-expected data, mainy due to an increase in shelter.  Odds of a December Fed rate hike jumped markedly.

Federal funds futures implied traders saw about a 52 percent chance the U.S. central bank would raise the target range on key short-term borrowing costs by a quarter point to 1.00-1.25 percent in December, up from 42 percent prior to the latest reading on the consumer price index, according to CME Group’s FedWatch program.  – Reuters, September 14

The head for spread continues as high-yield came in double digits, with the dash for trash outpeforming, probably due to the robust and more sustainable stronger global economic outlook and, of course, spread panic.

Bahrain priced its $3bn, three-tranche bond issue at 5.25 per cent for 7.5-year money, with a 12-year maturity at 6.75 per cent and a 30-year tranche at 7.5 per cent. Investor demand was strong with deal 5x oversubscribed.

Bahrain is rated BB- by S&P and BB+ by Fitch, both with a negative outlook.

Portugal regained their investment-grade sovereign credit rating, with S&P raising its rating on the country by a notch from BB+/B to BBB-/A-3 on Friday.

The stable outlook balances our expectation of solid economic growth and further budgetary consolidation, as well as receding external financing risks over the next two years, against the risks of a weakening external growth environment and vulnerabilities emanating from high, albeit falling, private-and public-sector debt. – S&P via FT, September 15

China plans to bring a dollar-denominated bond for the first time in a decade, The final terms are not yet set, but Beijing is expected to raise up to $2bn, most likely in 10-year notes.

The Russian central bank cut rates 50 bps to 8.5 percent.

Weekly_Bonds

 

Global Currencies

The story of the week was the the British pound for all the reasons mentioned in the bond market review above.   The yen also had a tough week as traders seem to be questioning its haven status as missiles from North Korea fly over the island nation.

The dollar index continues to hover around 92 as the euro/dollar is having trouble breaking through the 1.20 level.   Watch 91 on the index now.

Why is the euro rallying?  Because it can.

Bonds are slow to adjust to the much improved economic and inflationary conditions in Europe due to  repression caused by the ECB’s asset purchases (QE).  The pressure has to be released elsewhere, and the currency market has little or no government intervention and trades relatively free.  It may also be causing the euro to overshoot.

The short-term fate of the dollar is dependent on the Fed’s FOMC statement and press conference this coming week.

Will they announce the of start quantitative tightening (QT)?

Given the significant loosening of financial market conditions since the beginning of the monetary tightening cycle, we think so.

It is going to get interesting from here, folks.

Weekly_Currency

Select Commodities

Hedge funds, running net short, were covering their wheat futures at the end of the week as worries over the Australian crop due to colder than normal conditions made traders nervous.

Crude up nice on the week. It appears the market is balancing quicker than expected.  Global demand is starting to accerelate with the global economic recovery.

Risks to the price are a ramp in U.S. production and backsliding by OPEC due to the higher prices.  Upside price risk,  include Venezuela production is declining and there is pressure on Libyan, Nigerian, and Mexican production.   Also note the widening spread in Brent and WTI spread  (see our Global Risk Monitor – other risk indicators),

Finally, we continue to see a wide spread between WTI and Brent. That spread has been above 10 percent for five consecutive daily trading sessions.

The last time this happened, it came at the end of a significant trend in which the spread expanded to a double-digit percentage difference, with early September 2015 comprising the end of the cycle. Two periods of major pricing advances occurred during that trend. – OilPrice.com, September 15

 

Iron ore seems to have put in a short-term top on the weaker China data that came out late in the week.

Lumber futures came under pressure on Friday mostly due to the roll in the daily nearest contract and there is now speculation the U.S. government may have to back away from tarrifs imposed on Canada due to an unexpected increase in lumber demand to rebuild Houston and Florida after the dual hurricanes.  Lumber prices are already up 20 percent this year.

… Paul LePage, the Republican governor of Maine, asked the U.S. to at least suspend the tariffs until the hurricane rebuilding has been completed.

LePage said “corporate greed from a coalition of big lumber companies” already sent softwood market prices soaring.

“Making a profit is the goal of any company — and it should be,” LePage wrote in an op-ed in The Maine Wire.

“But it is unconscionable that this coalition is in a position that could lead to price-gouging Americans in distress.”

The National Association of Home Builders in the United States made a similar plea to the White House earlier this month. –  The Canadian Press, September 16

 

Weekly_Commodities

Other Risk Indicators

Semis continue to rock partly due the bitcoin story.

European banks up on higher interest rates across Europe.

The Russell is making a nice bounce and now back above 1,400, a key level, which reflects postive growth expectations.

Bonds and VIX down big.

Weekly_Other

What Is On Our Radar

The FOMC will be big this week.

We do expect them to announce the start of the quanitiative tightening (QT).  Financial market conditions continue to loosen.  The window is open.

We are expecting a speed wobble but no big market disruption. Yet.  The level of reserves are so high in the financial system a few $10 billion here and there will not do much.  A 10 percent reduction will start to bite.

Flows matter?  Not yet.

QE3 stopped long ago and the markets keep on rocking.  It appears credit based money is partially picking up the slack of the the termination of central bank base money as QE ended in the United States.

With the markets in full blown “beast mode” they will probably focus on a possible lowering of the dots and use it as an excuse to move higher, setting up a bigger October correction, in our view.

European Bond Market

We are watching the European bond market very closely because that is where the big bond bubble is.   Growth and inflation are accelerating in Europe, and interest rates are waaaay out of line.

A temper tantrum in the European bond market, causing a spike in market interest rates spilling into the U.S. is the trigger most probable on our event risk checklist that will cause the short sharp sell-off in risk markets in October that we are expecting.  We will have a post later in the week with more in depth analysis.

The U.K. may be the canary in the coal mine – a spike in 10-year rates of 32 bps, or over 30 percent, this week.   Inflationary fears causing interest rates to spike is possibly the worst case economic scenario for the risk markets.

Nevertheless, risk loves the global growth Goldilocks scenario, for now, and still cannot stand 0-2 percent interest rates.  All in the context of extreme valuations.

We expected a blow off buying spree in September setting up for the October correction.

It now feels like we are in that giddy/blow off stage.  All lathered up and only a little more to go.

Wouldn’t chase here, unless your a very short-term flipper, and would be reducing risk going into October.   No shorting until the break and then be quick on the draw to cover as everyone aglo in the virtual world will be looking to buy the big dipper.

Then it will be time to reassess the probability the raging bull market continues (doubt it) based on the inflation outlook, future ECB and Fed policy, and, probably most important, the action in bonds markets.

No Big Bear Yet

It is currently hard for us to imagine a 2000 or 2007-08  scenario with the synchonized global growth story until interest rates move several hundered basis points higher in Europe and 100-200 bps higher in the U.S. x/ some Black Swan event.  Higher interest rates will bring the extreme valuations to the market forefront.

In general, never short risk markets, unless for a short-term event driven trade as you know John Bull can stand many things but he cannout stand negatitve, zero, and two percent interest rates.   Yield and return chasers will run you over.

A seven to plus ten percent correction and a decent blow out in credit spreads precipitated by a European bond market temper tantrum given current valuations?   In a heartbeat.

Mr. October on deck.

Key Charts

Weekly_Charts_1

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Weekly_Charts_2

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Weekly_Charts_3

 

 

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Sector ETF Performance – September 15

ETF_DayETF_WeekETF_MonthETF_QETF_YTD

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Global Risk Monitor – September 15

RiskMon_1

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RiskMon_2

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Tweet Of The Day: Traders vs Analysts

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