I’m still nursing a New Year’s hangover. It takes a long time for the mind to rid itself of all the news the mainstream media deems fit to read. But as the third rock keeps spinning, markets will keep moving and we will strive to untangle the ball of confusion. After today’s tepid ADP data the market has settled into a consensus for 175,000 nonfarm payrolls. Again, I would love to see a number greater than 250,000 just to test the recent market action. BONDS rallied, currencies rallied against the DOLLAR, precious metals are showing early year strength and commodities have held support levels in the age of TRUMFLATIONARY EXPANSIONARY EXPECTATIONS.
Posts Tagged ‘bonds’
Everybody has opinions on the recent election outcome but as usual most of the opinions are from the echo chamber and not factual in any way. This blog is dedicated to seeking profitable investment and trading opportunities as I sort through the noise of the financial media. As with Brexit, the punditry found itself trapped in its own rhetoric and every prediction but the weakness of the pound proved to be WRONG, at least in the short to medium-term. British Gilts (10-year notes) rallied substantially in the post-Brexit confusion and most importantly the Footise stock index rallied 15% off its election night bottom. The POUND did weaken substantially against the U.S. dollar and the euro currency but I have argued for a few years that the British current account made the relative strength of the POUND to its key trading partners unsustainable.
When Janet Yellen delivered her speech on Friday morning the markets reacted to the dovish overtones via buying of SPOOS, GOLD, BONDS and selling the U.S. dollar. The initial action was less muted as the algo headline readers first though Chairwoman’s words mildly HAWKISH, but as key words were measured in context the sense was Yellen was being dovish in not leaning toward a September rate increase. Yellen did give us a significant barometer of data measurement. It seems that 190,000 increase over a three-month moving average is the FED‘s BOGEY. This Friday’s estimate is 180,000, which now puts more pressure on its importance because of September’s FOMC meeting. As usual, Yellen said,”… the economic outlook is uncertain, and so MONETARY POLICY IS NOT ON A PRESET COURSE,” (emphasis mine).
Was today risk on or risk off? The U.S. dollar continued its recent weakness as the world’s major currencies all rallied against the “safe haven” greenback. The Reserve Bank of Australia cut its interest rate last night but even the Aussie dollar gained against its sister fiat currency. Global equity markets were down as the Japanese Nikkei was weak as the inverse correlated Yen was higher by one-and-a-half percent. Yes, equity markets failed to send the U.S. currency higher.
It is hard to believe that NOTES FROM UNDERGROUND is approaching its 1,000 blog post. Many of the themes touched in my analysis have had an echo effect. Certain themes have continued to provide trading opportunities over and over. 1. The European financial crisis; 2. The Fed’s destruction of the bond market; 3. The ECB‘s destruction of European sovereign debt markets in an effort to preserve the Maastricht strait jacket. 4. Russian geo-political moves on a timely basis to affect Putin’s desire for an increased role for Moscow on the world stage; 5. Japanese desires to fabricate an inflationary backdrop to ease the burden of debt overhang; 6. Too much or too little growth in the emerging market economies; 7. China’s desire too have an enlarged impact on the global financial system in fact and fiction; and oh so many more.
In the midst of a dramatic seven-day bond selloff, extending from Tokyo to Frankfurt, London, New York and all bond markets in between, Chair Yellen chose today to add verbal fire to stoke the bond rout. In the early hours GLOBAL BONDS had tried to stage a rally from the previous days of endless selling. (It seems that the ECB was in buying European peripheral bonds from Spain and Italy.) Once Yellen began her remarks the BOND onslaught began anew. The key paragraph in the Yellen interview: “We need to be attentive–and are–to the possibility that when the Fed decides it is time to begin raising rates these term premiums could move up and we could see a SHARP JUMP IN LONG-TERM RATES” (emphasis mine). Upon the utterance of those six words the markets took note and the selling of all bonds in Europe and the U.S. accelerated.
In the recent blog post I opined that the nonfarm payrolls (NFP) would be above the long-hoped for 300,000. The actual number was a “tepid” 214,000. The market was certainly anticipating a large addition for why else would the DOLLAR selloff and the BONDS have such a sustained rally. The SPOOS and other equity markets closed unchanged on the day–stronger for the week–but the post-jobs report reflected that it will take strong economic data to push equities higher in a world without FED purchases and a confused ECB. The strongest part of the unemployment report was the fall in the U6 data, which fell 0.3% percentage points to 11.5%. Unfortunately for Chair Yellen wages gained a slight 0.1% indicating little upward pressure on pay.
During the last month markets have adopted the approach of “Don’t Worry Be Happy.” No event increases risk awareness as central banks being perceived as the guardian angel of all global investors, so every possible geopolitical event is merely a fresh buying opportunity. This week brings the ECB rate decision and consensus seems to be that President Draghi has secured a vote in favor of cutting interest rates from 0.25% to 0.15%, a drop of 10 basis points, or, as the talking heads and pundits of pabulum will with great fanfare scream, the ECB has cuts interest rates by 40 PERCENT. Ah, the beauty of small numbers in a zero interest rate environment. I DOUBT THE ECB WILL GO NEGATIVE AT THIS TIME. Why? Negative interest rates by a large central bank will be an experiment that the ECB will not wish to embark on, especially as U.S. money market funds have returned to providing short-term financing for European entities. Going negative may result in money market funds shying away from the uncertainty of negative deposit rates paid by the central bank.