Notes From Underground: Headlines Drive the Algos and the Circle Remains Unbroken

I’m going to be off for a few days, even if this Fed meeting proves to be the most market-moving week in many years.

The news from North Korea proves to be a non-event (as suspected). On Wednesday, we get the FOMC statement, which OUGHT to meet market expectations with a 25 basis point increase and some sense of the interest on excess reserve (IOER) rate in reference to fed funds. There is much discussion about the FED reaching “normal” interest rates, meaning neither too weak nor too strong to reach its dual mandate.

In a CNBC interview on Tuesday, Paul Tudor Jones spoke about an issue that NOTES has discussed for the last six years. According to Tudor Jones, if he ran the FED he would raise rates to 3.5% for that would represent historical normal (my term) levels. The chyron writers for CNBC said Jones was wildly bullish equities for the third and fourth quarter. Why? Because real yields will remain NEGATIVE even with another rate increase (or two). The reality of negative real yields is what continues to make a multitude of asset classes desirable for investors. As Tudor Jones quipped, tech companies experiencing growth rates of 10-20% are cheap when real interest costs are zero.

In Europe, negative real yields are historically low, which is why I keep maintaining that GOLD in terms of fiat currency levels, remains an attractive asset. The FOMC statement will be a good test of the gold/currency crosses as the GOLD will break on the announcement. But how GOLD performs as Chairman Powell’s press conference begins will provide substance to my contention. Be patient with your trading because the headlines will induce algo-driven volatility and provide opportunity for profitable trades.

Unless the FOMC moves in a more dramatic fashion, say, A 50 BASIS POINTS INCREASE OR ACCELERATING QUANTITATIVE TIGHTENING, real yields will still remain TOO LOW to chase investors out of risk-on positions.The press conference will be interesting to see if there is any sense of where Powell plans to reveal a sense of what he perceives to be the neutral rate. Based on current inflation and jobs data. Listen to any questions concerning the fear of lack of DOLLAR liquidity in the global system (a reaction to the Financial Times piece by Reserve Bank of India Governor Patel last week). The FED is draining liquidity while raising rates causing some potential contraction in emerging markets. Is this an issue for the central bank?

Also, as we saw Tuesday, Treasury’s deficit for May grew more negative, which increases the need for additional Treasury borrowing. The government will be competing for funding in a market awash in Treasury bill-like substitutes.

Headlines will not capture the substance of the questions and Powell answers. Be prepared with your support/ resistance levels as Powell’s views are exposed to the light on market analysis. Two key issues to listen for are FOMC concerns about the increasing impact from the Trump tax cuts and fiscal stimulus, and tariffs. Those tariffs could slow economic activity on a global scale.
The BOJ will follow the ECB. If the Europeans remain steady in their monetary policy, the Japanese will be reticent to announce any ostensible change. The Japanese have begun a form of QT because there are no JGBs to buy so it seems that BOJ asset purchases are targeted at equities. Rick Santelli thinks that Governor Kuroda may surprise the market and revel a policy change. If the Europeans were to do so I would agree. Otherwise I respectfully dissent. Yes, inflation is picking-up in Japan but why fight it when they can tail coat the Europeans and wait, hoping to get to that beloved level of 2% inflation? Substance and context will prove more rewarding then headlines. Proceed with patience.


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7 Responses to “Notes From Underground: Headlines Drive the Algos and the Circle Remains Unbroken”

  1. Chicken Says:

    $US is up and so are silver/gold. This circle of trust subject is confusing!

  2. GreenAB Says:

    Allow me to update you from Germany. Things are going crazy over here.

    The CDU and CSU are in a MAJOR feud that could bring the whole coalition down.

    It´s all about the refugee policy. As you know, the CSU is the sister party of the CDU. They only run in Bavaria. In autumn they will have important regional elections at which they are in danger to lose their majority, because very conservative voters have jumped over to the AfD. So the CSU is in desperation mode. In trying to appease the right wing potential voters they aren´t stopping for nobody, not even Angela Merkel.

    So here´s what´s going on: when the new government was formed the CSU claimed the Ministry of Interior, which has the say over refugee policy. What they want to do now is to reject asylum seekers who registrated in another European country before. Which means, that if a refugee tries to enter Germany from let´s say Austria he will be rejected. Once that happens, Austria will do the same thing. Then their neighbour states are stuck with the migrants. And the will hand them further down the route. Which means, in the end countries like Italy or Greece, where most of the refugees enter the European Union, could be overwhelmed. As you know they already are the weakest members of the Union. Letting them alone with all those people could bring major uproar and danger for the whole EU. Merkel knows that and she´s trying to get a European solution.

    But the CSU doesn´t care. At the moment there is no solution and neither side is willing to give in. Which means that come Monday the CSU could try to go with their plan. As the German chancellor has the ultimate say Merkel could then overrule and fire Seehofer (CSU chariman and Secretary of the Interior).

    That could lead to a breakup of the coalition with the CSU leaving. Or they/Merkel could go for a vote of confidence in the Bundestag. Though Merkel officially still has the backing of their party a minor part (i guess about 20%) would back the CSU plan.

    Another wildcard is the SPD, which could destroy any compromise the CDU and CSU might agree on.

    So things could become very interesting over the next days. Normaly one would say the cooler heads will prevail. But you have to remember that all the CSU cares about is Bavaria and their own position in their home state.

    A perfect storm for the Euro by the way. The ECB finally exiting QE is a strong catalyst for the Dollar. If Merkel falls everything´s possible in Germany.

    Stay tuned.

    • yraharris Says:

      Green AB–thanks for the in depth post and keep us up to date as this can have important ramifications for many asset classes .Your views have proven to be very valuable and I hold your opinions in very high regard

  3. Arthur Says:

    America’s president is undermining the rules-based international order. Can any good come of it?

  4. Bobby Z Says:

    The President likes it when people get in a room and fight with each other. Chaos. It works for him.

  5. A.M. Look 6/13/18 | Says:

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