Have the markets turned for the better?
Abraham George Macro Musings
Since my last article, the markets have been on a tear. The S&P 500 found a bottom just under 3600 and has risen to 3850, the commodities have found a bid with the dollar making a U-turn. Even the 10-year yield is threatening to break below 4% in a hurry.
What caused all this? The main catalyst was the BOJ. For the most part of the year, the YEN has been weakening against the dollar and that had risen to more than 30%. The BOJ picked the right moment of oversold and thin market conditions in NY last week to have the maximum impact, creating ripple effects in all other markets too.
Though the public announcement was that the BOJ intervened in the markets we do not know if the ECB, BOE, or even the FED came to their rescue. If the intervention happened without their tacit support and if market forces were strong enough to counter the BOJ’s efforts chances are more that BOJ will fail.
However, I think there is tremendous coordination between the major central banks as seen from the actions of the Bank of England and the Bank of Japan. Unlike the markets, the central banks play a much longer-term game to disguise their strategies and with a lot of patience to ensure their actions play out over the longer term.
If you have been watching the US Dollar index the absolute top in the 20 % rise in the dollar index happened on the day of the BOE intervention. The second high was on the day of the BOJ intervention. My point is never to ignore the central banks or go against them. But position yourself to suit their intentions and read between the lines.
I have been alluding to the theory that the Fed will slow down in its efforts to raise rates and even go back on its announced policy of QT. The recent rapid hikes have created havoc in the US especially with mortgage rates rising above 7 % and internationally emerging market debts exploding plus imports becoming unbelievably unaffordable for non-US countries. In fact, what the Fed has done in the last four months with the rapid rise in interest rates and the dollar going up is that they have exported a large part of their inflation abroad.
Until a week back markets were positioned for a 75 basis point hike or even one percent when the FOMC meets on 02 Nov. With the Bank of Canada has raised only 50 basis points yesterday when the expectations were for 75 basis points, think market participants are coming to a consensus that the Fed will also only raise by 50 basis points. If that is the case think the equity markets and commodities will catch a much stronger bid and even the dollar will come down further.
On another note, the recent weakness in oil was all caused by the Biden administration’s program to drawdown from the Strategic Reserves. As of yesterday, that has come to an end and I think oil will start to move higher again. As discussed in my oil report earlier, the high 70 handle was good to get long.
However, in a market where senior policymakers make such statements as below, we need to be prepared for anything:
US Treasury Secretary Yellen: I’m not seeing anything in markets that causes me to be concerned (11 Oct 22).
US Treasury Secretary Yellen: I’m concerned about the loss of adequate liquidity in treasuries (12 Oct 22).
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.