Will the Fed end the stimulus?

Abraham George Macro View

The Fed has been making noises and sending delicate messages that there will be an end to the stimulus program. How they are doing it and when they are doing it is not made clear. These are also tactics used by the Fed, so that whenever it happens it doesn’t have much of a shock effect.

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As per the minutes released yesterday the economy is growing at 7% this year , unemployment is falling to 4.5% (historically that level is considered as full employment) and inflation is running at 3.4% (which is at the top end of the long term average). What is clear, though the signals are coming from the Fed, the White House and the Congress are in full control of the situation.

Those who are worried about the meteoric rise in stock prices are forgetting that more multi- trillion dollar infrastructure spend is coming. Understanding the inflation-deflation conundrum will be the key to success in financial markets. Whatever it is, the current playbook should continue to push wages higher, create labor shortages and ram up inflation.

Equities

Of the three major US indices the NASDAQ has been the strongest. A turn in NASDAQ supported by the small caps and secondaries could be the first signs of a correction in the markets.

One of the market’s broadest stock indices, NYSE composite index made a high on June 10 which was nearly a month ago. Though the index is close to its previous highs it has not exceeded it. These are all signs of tiredness in the markets but even if it turns lower the million dollar question is will we get significant turn considering the stimulus that the government has in the pipeline.

The S&P 500 had a significant decline yesterday but was fully recovered by the end of the day and even posted new highs. Breadth was flat (0.95: 1) and the NYSE up/down volume was solidly negative (35.8% up vs 64.2% down). The S&P 500 has closed 10 out of 12 times higher in a row.

Bonds

Bond futures spiked to 163^26 yesterday. The new high indicates the corrective price action continues to subdivide to the higher side. The daily sentiment index is at 82% which is slightly shy of the previous highs in a corrective up move.

Euro

The euro’s decline from 1.2267 on May 25 could still be labeled as a corrective one. Believe supports close to 1.1780 should not be violated.

Gold

Gold has never had it so good in terms of news flow. But price action to the upside is not at all convincing. Chances are more that it will top out between 1815-1855. Should it top out in that vicinity, the downside could get very interesting again.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.