Summary – A top-down review of interesting calls and comments made last week in Treasuries, monetary policy, economics, stocks, bonds & commodities. TACs is our acronym for Tweets, Articles, & Clips –our basic inputs for this article.
Editor’s Note: In this series of articles, we include important or interesting Tweets, Articles, Video Clips with our comments. This is an article that expresses our personal opinions about comments made on Television, Tweeter, and in Print. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Macro Viewpoints & its affiliates expressly disclaim all liability in respect to actions taken based on any or all of the information in this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerance.
1. “Fed next week, to me, is everything … “
said Tim Seymour of CNBC Fast Money on Friday. We have been clear in our conviction that this rally has been due to expectations of additional liquidity from the Fed. That was virtually proven this week not with the Fed but with the Fed’s cohorts. The stock market was meandering until Wednesday with about a 12 handle decline in the S&P. Then Draghi reiterated his “whatever it takes” determination on Thursday morning and the US Stock market exploded up 320 pts & the S&P by 33 handles. If that wasn’t enough, China came in on Friday morning NY time and announced cuts in their lending rate, deposit rate and reserve ratio of banks. The Dow closed up 150+ points on Friday and the S&P by 22 handles. If that isn’t enough, Bank of Japan is on deck for next week with expectations of greater liquidity or promises of it.
But there should be no question who the big hitter is next week – the Fed. In the past 3 weeks, the Dow is up 10% in a straight line from the morning lows of Friday, October 2. And the S&P is up 200 handles or almost 11% in that period. Yet there is no measurable change in the economic data in these three weeks. So what does the Fed say this coming week? Do they maintain the dovish stance of the last Fed meeting or do they show a stiffening of resolve to raise rates sooner than what the market is expecting. Chair Yellen moved to side with the doves in September. Will she move a bit to the hawks next week?
The S&P and the Nasdaq 100 are overbought and extended. But the broader indices are not keeping pace and the average stock is significantly underperforming the leaders. Just look at the divergence between equal-weighted & regular cap-weighted S&P vs. the S&P performance from NorthmanTrader.com.
So a more dovish than expected FOMC statement may well propel stocks into a 1999 type of a narrow explosion. Will the Stan Fisher wing of the FOMC accept that? Even the doves like Dudley have voiced the line about a rate hike coming in 2015 if the data justifies it. And there are two payroll numbers ahead of the December FOMC meeting. So will the FOMC statement err on the side of reminding markets that a rate hike may indeed come in December? And if they do, how will the markets react? Other markets are hinting of such a possibility.
The 5-year Treasury yield, the best market indicator of a stiffening resolve of the Fed, is up 7 bps this week and the 30-5 year curve has flattened. And Emerging markets severely underperformed the S&P. Are these markets hinting of a re-divergence between European liquidity and US liquidity? As Rick Santelli pointed out on Friday, the US-German 10-year spread, which had remained stable for a long time, widened by 10 bps this week.
The way we see it, convergence in liquidity injection from US, Europe, Japan & China is the basis for a major extension of the current rally. Re-introduction of this summer’s divergence between US & the rest of the world might pose a significant risk to the rally. Can the Fed thread this needle? And if they do, would the year-end seasonality be enough for US markets?
Frankly, the impact of the FOMC statement might last just a week. Because another lukewarm jobs report on November 6 could override whatever modest amount of hawkishness Fed might choose to inject next week. And a stronger than expected payroll report will reintroduce rate hike risk regardless of what the Fed says next week.
We do not mean to underplay what Amazon & Google-Alphabet delivered in stock performance on Thursday evening. But the real stories on Thursday and Friday were the bigger & less sexy McDonalds & Microsoft. Because the 10% rallies in both MCD & MSFT eclipsed the 6% rallies in AMZN & GOOGLE at the close on Friday.
Every one has seen what the tsunami of central bank liquidity can do to charts & valuations both when it rises from the sea and when it recedes from the land. So we see no point in engaging in any discussions today except, perhaps, share a couple of opinions:
- David Rosenberg – This is about the most impressive rally we have seen in both breadth and depth this year
- Rich Bernstein – This cycle is quite unique in that the Fed is threatening to raise rates when the US is actually in a profits recession. That has never happened before, and may explain the US equity market’s recent jitters
- Bob Doll, Nuveen ?@BobDollNuveen – Despite recent market strength, I don’t think there’s enough technical strength for a sustained equity rally. http://ow.ly/TAtD4
- J.C. Parets ?@allstarcharts – a little over 3 weeks ago I changed my bearish tune & saw enough evidence to get long stocks across the board. At this point tho it’s a fade
3. Other markets
The currency markets, interest rates & commodities are probably even more tied to what the Fed & BoJ say next week. They tell us that it is wise to refrain from trading until the right time or right opportunity. That is just as true about opinionating. So we end our article right here.
4. Safe to stay away
What happens when a star gets too close to a black hole in space?