For a macro investor, things so far have been not that exciting. But for a short-term trader with a proven (positive expectancy) methodology, money-making opportunities were in no short supply. There is sufficient volatility enough alpha to be captured if you have a proven system.
In a little over two weeks, we have the Fed meeting and it is a forgone conclusion that the Fed will raise rates by 50 basis points this time. Will that do anything much to the markets? I don’t think so. It is already discounted in the current market prices. The surprise element will be only if they do something contrary to a 50 basis point hike. The jawboning by the Fed and the major investment banks about raising interest rates have already caused the ten-year yields to rise to almost 3%.
The Fed has control to act on only the short end of the curve but they do can influence the long end of the curve. So what matters now is not what they do but what expectations they create. Current price actions indicate that the stock markets could be on a good wicket for the next three months.
Firstly, the sentiment indicators are mostly pointing to extreme weakness. There is almost 50% bearishness in the market and only 15% optimism. Optimism is at an almost 30-year low. Sentiment indicators are to be viewed as contrarian indicators. Secondly, oil prices could be topping, albeit temporarily. It had run up too much, too fast. A pullback to $60 should not be surprising but the long-term trend for oil is still intact. April, May, and June seasonally have been a good period for stocks. There could even be a settlement for the war situation in May.
Putin is under tremendous domestic pressure and from his oligarchs. Many of his former oligarch associates are turning openly critical of him as they have been losing heavily because of the debilitating sanctions. Though mortgage rates have risen beyond 5%, they are still low on a historical basis. The consumer is still 70% to 75% of the economy and they are very vibrant. Earnings figures are coming solid and there may be outliers like Netflix. But overall the trend is strong. While the COVID situation is at an extreme in China, the markets are opening up in other parts of the world. Travel, restaurants, and entertainment could all contribute more to the economy.
More importantly, global central bankers and finance ministers are gathering in Washington this week for the spring IMF and World Bank meetings.
One of their major discussion points will be inflation. What can they do differently to manage inflation? Buying bonds to keep interest rates down has been done for the last almost 15 years and will not be repeated soon. The Fed has anyway telegraphed that they are going to be out of the QE business. They can’t get back into it straight away while they will come back to it at a much later stage. As another writer pointed out the QE may be the Hotel California of monetary policy, “you can check out, but you can never leave.”
QE’s biggest proponent has been the Bank of Japan being in some form of QE for the most part of the last 20 years. In fact, very recently they stepped up their bond-buying program. Yesterday, they announced that they are a buyer of Japanese government bonds in unlimited amounts. They have a target to maintain their 10-year JGB yield at 25 basis points. They are doing everything in their power to achieve this. No doubt their debt to GDP is going through the roof. Currently, it is around 260% but it is all domestic debt.
So what’s happening in Europe? On one hand, they are also communicating that they will stop QE but it was only earlier this month that they were meeting to formulate a plan to prevent a spike in sovereign bond yields, especially in the weaker European countries. If by any chance Le Pen comes to power in France, more QE is almost certain.
Will these developments in Japan and Europe lead to foreign central banks buying US government bonds? I think it certainly can pin down US interest rates. What has worked repeatedly in central bank history has been globally coordinated, concerted, harmonious action.
Is it that the US ten-year yield has put up a top yesterday? It could be. There are technical signs of a reversal. This also will be a very good sign for the much-beaten tech stocks to make a reversal. As reported earlier, the line in the sand for the S&P 500 is 4,300. So far, it has respected that area very well and there are good signs that we could be breaking up soon as well.
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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. Currently, he is a co-founder of a new hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.