The markets are in turmoil and it gets the mind to thinking: What could possibly have caused today’s reversal in the stock market and the long end of the BOND MARKET? The market seemed like it was on the edge of a complete risk capitulation. The dollar was dropping, bonds all over the world were in rally mode and the precious metals were finally finding some technical strength as the GOLD (in pure dollar terms) had finally rallied through its 200-day moving average. Even the SILVER was able to synchronize with the GOLD and break out of three months of resistance. (The silver 200-day is at 15.13, still a bit above its closing price.) The global stock markets were cascading lower as the Nikkei and German DAX took out their lows made the night of the BOJ’s surprise move to a three-tiered negative interest rate policy.
The U.S. economic releases today were mixed as the SERVICES PMI was on the weak side, but the ADP data was stronger than expected. There was an early attempt at a stock market rally as NY FED PRESIDENT Dudley tried to “do right” and talk U.S. economy down and interest rates lower for longer. The DUDLEY rally soon lost steam and joined the foreign markets lower, taking away last Friday’s substantial gains. Then the reversal began at 1 p.m.
Yes, I know the OIL was HIGHER, SHORT-TERM INTEREST RATES WERE LOWER and THE DOLLAR HAD DROPPED MORE THAN 2 PERCENT. In FACT, THE CHINESE GOVERNMENT CALLED TO PROTEST U.S. EFFORTS TO DEPRECIATE THE STRONG DOLLAR (SARCASM INTENDED). So the stage was set for a total rout of the global financial markets. BUT WHY THE REVERSAL IN EQUITIES?
Here are my pure thoughts without the pollution of the DAVOS crowd: THE FED HAS HAD A SERIOUS PROBLEM SINCE THE END OF QE. THERE APPEARS TO BE A SHORTAGE OF DOLLARS AVAILABLE TO FUND THE OVER-LEVERAGED BALANCE SHEETS OF EUROPEAN, ASIAN AND MOST EMERGING MARKET FINANCIAL INSTITUTIONS. THE FEDERAL RESERVE HAS A POLICY TOOL TO OPENLY LEND TO FOREIGN CENTRAL BANKS: SWAP LINES. UNDER THE RULES IMPOSED AFTER THE GLOBAL FINANCIAL CRISIS, THE FED HAS THE ABILITY TO LEND MONEY TO FOREIGN BANKS AT A CURRENT RATE OF 86 BASIS POINTS, a high cost in a negative rate global environment.
BUT THE PROBLEM IS (AS HARD AS IT TO BELIEVE) THERE IS A GLOBAL SHORTAGE OF DOLLARS RELATIVE TO THE WORLD’S BLOATED BALANCE SHEETS. IT IS THE BLOATED BALANCE SHEETS ENABLED BY THE FED’S EFFORTS AT QE THAT WILL CAUSE THE FED TO REMAIN EXTREMELY ACCOMMODATIVE FOR LONGER. THE FED WILL OFFER UP DOLLAR RESERVES TO THE WORLD AT ZERO INTEREST RATES TO PREVENT A COLLAPSE OF THE GLOBAL FINANCIAL SYSTEM.
THIS IS A CLASSIC CASE OF RICHARD KOO’S BALANCE SHEET RECESSION ON A GLOBAL SCALE. THE FED OFFICIALS ARE CAUGHT IN A BAD SITUATION AS THE WORLD’S BANKER WITH THE RESERVE CURRENCY IN ITS ARSENAL. THIS IS WHAT MICHAEL PETTIS HAS FOREWARNED: THE EXORBITANT PRIVILEGE HAS MORPHED INTO AN EXORBITANT BURDEN.
If we are in a paradigm shift then the algos and all their correlations are going to be caught off guard. One day does not a trend make but be aware of shifting sand beneath your feet. News of large usage in SWAP LINES may not be made this week or next but watch for the recently established patterns to undergo a metamorphosis. Remember, good trading, like science, advances one funeral at a time in the realm of ideas.
***At 6 a.m. CST tomorrow the Bank of England will announce its interest rate decision. There will be no change as BOE Governor Carney will be slow to change policy, especially in the midst of the political discussion on the EU referendum. Some analysts believe that British inflation data is rising and will force the Monetary Policy Committee to move earlier than the market has anticipated. Carney speaks at 6:45 a.m. about the INFLATION REPORT, but the BOE has allowed inflation to run hotter than planned without raising rates. This happened several times under the Governorship of Mervyn King. Again, be cautious in buying the POUND in anticipation of a more aggressive BOE.
“Ooh, you’d like to be my fatheryou’d like to be my dadand give me kisses when I’m goodAnd spank me when I’m badBut since I’ve left my parentsI’ve forgotten how to bowSo when I’ve got something to say,sirI’m gonna say it now.”— Phil Ochs
Tags: ADP, BOE, BOJ, central banks, DAX, ECB, Equities, Fed, FX swap lines, Gold, Mark Carney, oil, Pound, QE, silver, U.S. Dollar, William Dudley
February 3, 2016 at 6:20 pm |
Yra,
If these huge Dollar Swaps are announced what markets would you look for trade set ups where the algos would be caught left footed?
February 3, 2016 at 7:33 pm |
trader–i posted a separate note–sorry for the confusion
February 3, 2016 at 7:33 pm |
Trader–let me make clear–this is a hypothesis based on the trading action of the last view days—–the corelative activity will be precious metals,currencies,commodities and equities all moving higher and the yield curves in the U.S.ought to steepen as it becomes clear that the spigots will be ope—the unemployment report will become very interesting and my initial thought is I wish for a strong number to see how the market reacts–for if it is a dollar issue then the Fed will be on hold even with another robust jobs report—-but it is early in this game but i am readjusting my perspective to the shift in the markets
February 3, 2016 at 8:44 pm |
Let me offer an alternative hypothesis to the dollar swaps suggestion. On October 19, 1987 there was a market crash. One year later the President’s Working Group on Financial Markets (PPT) was created. The group consists of the Secretary of the Treasury, and the Chairs of the Fed, the SEC and the CFTC.
What caused the unexplained reversals today? What caused the freefall of January 20 of 565 points that turned up on a dime? My most likely explanation is the intervention of the PPT. These same forces have been suppressing the price of precious metals as the QEs were busy liquefying the financial institutions.
$57 trillion in new debt has been created globally since 2007, almost half by China. Or to paraphrase Senator Everett Dirkson, “A billion here, a billion there, and pretty soon you’re talking real money.” (just add 3 zeros). The problem is so big, that Fed swaps are Band-Aids on a gaping IED wound.
As mentioned previously, watch the financials that are quickly becoming toxic. All the rest is noise. Or as Tennessee Ernie Ford told us:
You load sixteen tons, what do you get?
Another day older and deeper in debt
Saint Peter don’t you call me ’cause I can’t go
I owe my soul to the company store
February 4, 2016 at 7:06 am |
Asherz—again.A good post and sound dialectic—more only point is that a short-term dollar shortage–wow an oxymoron of the first order—has to be met by the reserve bank and that is my only point.In a world of negative nominal rates the Fed is going to have to find a way to provide and they will do it under the guise of concern for the domestic economy.The bonus is that the large hedge funds and other uber speculators arelong dollars and therefore the central banks get to punish the “locusts” and take the wind out of their sails–always a delight .Does somebody want to tell Soros what his friends had to say about him ,of course in an open society kind of way,after he blew the Brits out of the EMS—wasn’t brotherly–oh well let’s the games continue.
February 4, 2016 at 5:24 am |
Hello I’m not understanding yet. Did the 1 pm rally reversal occur because traders think the fed will print money to save the global economy, therefore it is safe to buy stocks because they will go up, and this is just another bargain dip?
If boe does not raise, then Gbp will not be attractive to buy & therefore will fall?
Thanks
February 4, 2016 at 11:21 am |
Yra- Good post.
To look from 40,000 feet, I think we are transitioning from financial assets to commodities, as the best store of value.
As you, I, and Asherz(today) have pointed out, the debt overhang is so large that it can only be repaid in inflated dollars. If no big inflation, much debt will have be bought by the central banks on a massive scale (causing inflation later) and/or much debt will default.
That said, I expect one or two more lows in oil, but Gold has probably made its bottom.
Crude rallies are now rallying equities, but crude rallies will break equities, at some point.
I think this setup is much more dangerous than 2008. Central bank policies have caused stocks, bonds worldwide to become grossly overvalued for the current slow growth economic scenario.
Sub-prime mortgages were only 2 $Trillion at their peak. I would guess there is well over $100 Trillion in grossly overvalued assets worldwide.
I have met the enemy, and he is ludicrous monetary policy.
February 4, 2016 at 2:44 pm |
Shocked –and if you read Kuroda ‘s speech from Tuesday night–the arrogance of central bankers is overwhelming.The group think taking place in the central banks of the world breaks the greatest TABOO of all—incest.
February 4, 2016 at 1:06 pm |
Currency swaps are important and rarely understood. Makes it fun. I will never forget, as the Eurozone headed into what looked like a terminal bond crisis in Nov of 2012 (and just after the advent of the ever so important QEIII), watching ( and trading) the machinations of the Fed.
It was completely transparent to me that the Fed was holding in the swaps market. Despite Draghi’s statement’s to hold the Euro together in August of 2012, he had no tools in his quiver in November and European bond yields were rising.
Lo and behold, shortly after Draghi announced the advent of his own QE in December 2012, there was the tiniest of announcements from the Fed, via reuters, around the 17th of December, that they would be engaging in 250-350 BILLION in “smoothing operations” over the next two weeks!
The Fed held Europe together for an entire month. As I wrote to a couple friends yesterday morning, the fed has been engineering a dollar selloff for about one week. Take off point was yesterday.
They are ACTIVE right now and desperate to get commodities off the floor. If there is a time they can fail, it is now. They look desperate to me, but they want to win badly.
Great discussion as always Yra! Love them. Please shoot me an email if you get a moment. I’d love to catch up!
February 4, 2016 at 7:30 pm |
One more thing.
With commodities rallying like this, and the FED on hold, this looks like a perfect time for the yield curve to steepen…..maybe.
February 5, 2016 at 8:39 am |
shocked–I agree with you but the market doesn’t want to –today’s unemployment report of increase in wages flattening the curve for the moment as some think this will put the FED’s ballpark back on the program—four strikes and you are out—but i remain cautious until more is learned about the AHE increase and I say the maunfacturing number is a foul ball
February 5, 2016 at 3:18 pm
Yra- Wrong today on the yield curve, but stick by my call that it will steepen, soon (next week).
February 4, 2016 at 9:19 pm |
I predict Chinese officials will experience difficulty imprisoning these Yuan shorts.
February 5, 2016 at 3:14 pm |
chicken—-i think you have a bad fortune cookie
February 5, 2016 at 4:24 am |
hmm I “thought”, remember I am new at this, that the uptick was caused by reading the oil tea leaves. That although the inventory build was greater than expected that that came from imports and the actual US production was down. Thus indicating, to some, that oil had bottomed at $26. I think that the Opec cartel is massively broken and cannot be fixed, with Russia about to pull an Opec on our Natural Gas all is not rosey in energyland and that usually bodes poorly for everythings else, at least I thought so.
Which is strange as T boone Pickens just sold off ALL his oil holdings and was waiting it out.
So wouldn’t that “sigh of relief” cause the uptick?
February 5, 2016 at 3:22 pm |
a.l.—i think the Saudis and the Russian will reach an agreement to cut production and the trade-off will be for Russian help in Syria—-the Russians gain in power every day and their ability to make mischief and to use a silicon valley term–to be a disruptor and they now have first mover advantage—-the world is messy and it is going to get messier—-I remember in November 2010,John Kerry led a group to Syria and came back proclaiming that Assad was a reformer and the U.S. could work with him—that was followed up by Secretary of State Clinton claiming of Face the Nation in March of 2011 that again Assad was a reformer google it at your leisure—meanwhile the Russians in an old 1800’s type of maneuver filled the power vacuum and unless the U.S. wants a direct confrontation with the well positioned Russians will have to watch as many pissed off allies exchange partners—-all roads must go thru Moscow and when Russia moves on Erdogan and Turkey and the alliance fails to come to Turjkey’s aid,Putin will have accomplished putting an end to Nato that he believed lied to the Russian people on post-cold war promises—-The Times They Are A Changin
February 5, 2016 at 4:33 pm
Thank you Yra for such an excellent considered response. Especially as I spolt (sic) rosy incorrectly. NOTHING surprises me about the current “social realists” infesting the executive branch. The whole of the middle east is baffling to me. In the late 90’s the Chinese defense minister met with Mustafa Tlass and expanded military ties between Syria and China. THEN Haotian ( chinese defense minister) went to Israel to chat about the $1billion sale of RUSSIAN/ISRAELI ( stay with me) aircraft to China. Try working out the relationship probability matrix on that one 🙂
Nato has always provided me with many many laughs especially when I was working with Morgan Euroclear in Brussels, they often would be sniffing around wondering what we were up to. Prime Minister Thatcher used to watch the program I keep mentioning and here is another example as to why.
https://www.youtube.com/watch?v=IX_d_vMKswE
One thing we were discussing today was whether the Fed would CHARGE the depository institutions a safekeeping fee of 25 basis points rather than PAYING them 25 bp. King’s can you take it ( Bamber Gascoigne)
February 5, 2016 at 5:48 pm
Yra- When do you anticipate this Saudi/Russian deal will occur?
Will there be a “tell” that it’s about to occur?
February 6, 2016 at 8:27 am
Thanks Yra, wow great observations and definitely have my interest!
“I wish for a strong number to see how the market reacts–for if it is a dollar issue then the Fed will be on hold even with another robust jobs report—
So it seems the FED isn’t on hold (as of this moment, lol) and the number was below expectation.
Thus seems to be an $US issue the FED is defending $US. Difficult to comprehend, given the circumstances.
With our election coming, I suspect Putin wants influence?
I really don’t comprehend FED concern over $US
February 7, 2016 at 5:34 pm
shocked –there are so many moving parts thsi will take long to play out at least until the olympics –the russians seem to use distractions to make their points and also much going on in Turkey–remember this is a working hypothesis and need to see some other events unfold–but it bears watching
February 5, 2016 at 6:03 am |
[…] http://yragharris.com/2016/02/03/saysomething/ – […]
February 5, 2016 at 12:02 pm |
POTUS – “The economy is strong!”
Is it time to reference Noah’s list of items to bring with, into hell?
February 8, 2016 at 1:51 pm |
Disorderly conduct. All hell was an understatement.
February 8, 2016 at 5:48 pm |
Chicken—it is all in the eye of the beholder