Front-Running Big Ben
From Nic Lenoir of ICAP
Yesterday was certainly a perplexing day. Stocks screamed higher breaking out the key resistances and making it look like we are in for a bull run into year-end. Meanwhile bonds were bid, not acknowledging equities one bit, and gold and copper were mixed at best while the dollar index which was initially weak finished close to unchanged. Either it was a stat-arb holiday I was not made aware of or people are trully confused here.
It seems people have been factoring in a quantitative easing announcement of some sort for this afternoon, or at least the consensus is that the market has priced it in. Certainly given the economic slow-down we are witnessing, a lot of the uptick in equities must be relying on the expectation that the Fed will back stop not only the market but also the economy (name the stimulus program, monetary policy tool, accounting gimmick, everything on the menu is in season). Global liquidity in USD is making highs partly thanks to interest re-investment by the Fed and the BOJ joined in last week with unsterilized FX intervention, but the market is greedy and with growth solely relying on the money spigots and government spending to artificially prop up GDP as demand is weak, bulls want to secure the rally they anticipated by breaking out ahead of the Fed.
While demagogy and monetary largesse have long be the favored answers by politicians lacking any form of courage, and while quantitative easing will happen in the end simply because it is the only way to grow our economy in its present state, I personally feel that it will not happen today. Nobody seriously thinks the Federal Reserve Bankers are independent, they are linked to politicians by the same desire and need to see equities go up during their tenure no matter the cost. However there is one thing the Fed still takes a little pride in, and that is the fact it is non-partisan. This is an election year, like every other year, but with the fate of democrats looking pretty dark and only hanging on to the hopes of a stock market rally into November, the Fed would effectively pick a favorite by announcing quantitative easing in any way more meaningful than a promise to backstop the system (a promise the Fed has reiterated any chance it got). I have very little faith in the Fed, but the little I have left would clearly be invested in that it tries to not be a actor in an election.
What if I am right? Well the 5s/30s sector of the Treasury curve has steepened aggressively, and one of the first consequences of no quantitative easing announcement this afternoon would be for the curve to flatten. So close to all time highs it is a relatively sound way to play market deception post-FOMC. The other asset class that is an explicit bet on loose monetary policies is precious metals. I will not bore you with my chart package on gold, but the story is the same than it was Friday: we have large divergence on the highs both daily, weekly and 3-hour, we have tested and so far failed to bypass the resistance joining the tops since 2009, so technically the short-term picture make a strong case for a pull-back. These are probably the bets two ways to bet on the Fed disappointing Keynesian aficionados. Equities would most likely sell-off under that scenario but given yesterday's break-out I am waiting for a little bit more clarity before expressing a strong opinion, though I must point out that the VIX has not confirmed further upside so far which keeps me hopeful as a bear that we do get a correction.
Good luck trading,