Notes From Underground

Wow! Was it quiet in today’s market? The simple answer is yes but Notes From Underground never takes things at face value. The global markets digested Friday’s “robust” employment report and seemed content with the market results: stronger dollar, stronger equities, higher yields and selling of precious metals. The euro and gold were steady today, but the yen and Swiss were weak as the safe haven’s were shunned as the risk-on trade is back en vogue. I have no problem with the market’s assessment of the jobs data but there were other stories that piqued my interest.

1. In the Financial Times today there was an article by Sam Fleming and Joe Rennison titled, “Fed’s Powell Warns of Stagnation Trap.” The FOMC Governor sat with the journalists in an interview that was uber-dovish but seemed to receive no coverage on the networks. The caveat is that the interview took place Thursday before July’s unemployment data release. Interestingly, Governor Powell said, “In particular I need to see two really good employment reports. And then it is a conversation. I WOULDN’T BE POUNDING THE TABLE SAYING WE REALLY NEED TO RAISE RATES,” (emphasis mine). Then, more dovish language from Powell: “With inflation below target, I think we can be patient.” And in a major statement of the FED‘s THIRD MANDATE, Powell maintained the U.S. economy was “… not full of risk right now. But the issue is that if you look around the world there are just a lot of risks that could affect us. So it is a US economy that is probably pretty close to its pattern of the last seven years, but the risks to us from the global economy are to the downside.”

It appears that aside from Vice Chair Fischer, the FOMC Governors are far more cautious than the regional presidents. Governors Powell and Brainard seem to be running interference for the Fed Chair Yellen and she remains reticent to raise rates. We will HOPEFULLY get more clarity from Chair Yellen when she speaks at the Jackson Hole Summit in late August. I will remind NOTES FROM UNDERGROUND readers that Powell told me not to worry about the ECB‘s solvency because it has a printing press.

2. In monitoring the power of the printing press I am posting a reference point put together by Karl of Vine Street Trading. It shows the top ten holdings of three large investment entities, the Swiss National Bank, Calpers and the Norge Bank, which holds for the Norwegian Sovereign Wealth Fund. The top six are the same stocks. The main difference between the SNB and the large entities is that the Swiss central bank does not have any major ownership in any U.S. banks. The conflict of interest would probably raise concerns from the U.S. authorities. The herding effect is rampant and the power of major global investors to influence equity prices is easily discerned.

A poignant point needs to be raised as my pulse races: How can global investors maintain buying SWISS FRANCS when the SNB is pursuing the greatest con since tulip bulbs, Mississippi Stock and any number of other events from the Madness of Crowds? The Swiss print currency and exchange the ever-increasing fiat paper for the assets of real corporations. Last month, the SNB–through currency market intervention–added roughly TEN BILLION to its balance sheet by exchanging Swiss francs for global stocks and bonds.

3. There was an interesting piece from the FT this morning. A research poll by SENTIX found that the Brexit shock had only a temporary negative impact. The negative expectations of an economic downturn “… have not intensified in August. The devaluation of the British Pound and monetary easing by the BOE should have boosted investors’ expectations. According to investors surveyed by Sentix,the British economy is not expected to plunge into recession.” Now, the researchers at Sentix are in no better position than the Bank of England and Governor Carney to forecast a coming supply shock but it raises the question as to why the Monetary Policy Committee was extremely aggressive in last Thursday’s QE, rate cut and term lending scheme.

At best the outlook is uncertain as the Sentix research reveals. Did the BOE move to head off a “possible” recession to satisfy its own dire forecast of the economic dislocation resulting from a LEAVE vote? Or maybe Governor Carney sought to fire a shot in the currency wars by pushing the pound lower versus its main trading partner, the EU?

4. It’s August, the season of European beach vacations. Markets are quiet but the ECB, BOJ and now the Bank of England have plenty of bond buying to do. There is a growing chorus of BOND BEARS looking to short the U.S. and European markets. I caution all readers: Be patient because the central banks have a great amount of clout in a thin holiday market and with all global bond yields reacting in a relative return manner a short position can be readily be stampeded into losses by ECB‘s 80 billion euro of large asset purchases. Complicating the ECB‘s bond purchases is a conflict between President Mario Draghi and Bundesbank President and Executive ECB Board Member Jens Weidmann. The lack of large assets to buy under the ECB’s capital key guidelines is leading to rumors of an adjustment to the program.

MNI news reported on August 4 that the “… ECB will address scarcity risks by buying bonds according to the magnitude of a member state’s outstanding debt, rather than its weight in the central bank’s capital key, are premature.” Jens Weidmann seems adamant that the capital key will remain for “to focus on bonds with particularly high debt levels and low credit rating would move us further away from our mandate.” This is a very serious issue for the ECB because any move to undermine the capital key basis of the TLTRO AND QE programs would send the anti-Merkel AfD party rushing back to the German Constitutional Court for a decision on the expanded ECB policy. The pulse of the market is quiet but there are all sorts of issues that can bring sudden volatility to vacation thin markets. Enjoy the quiet but don’t be fooled by complacency.

Tags: BOE, BOJ, bond bears, ECB, Fed, Jerome Powell, SNB

This entry was posted on August 8, 2016 at 7:06 pm and is filed under Central Banks. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.