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Economics

Fed “Taper” is good news for the bond market

Investors are fretting over the prospect of a "Fed Taper," but history shows such will likely be good news for the bond market. Currently, it doesn’t seem that way, with rates rising post-announcement. As noted by CNBC:

"While the Fed has gone into…

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Investors are fretting over the prospect of a Fed Taper,” but history shows such will likely be good news for the bond market. Currently, it doesn’t seem that way, with rates rising post-announcement. As noted by CNBC:

“While the Fed has gone into policy retreat before, it has never pulled back from such a dramatically accommodative position. For the past eighteen months, it bought at least $120 billion of bonds each month, Such provided unprecedented support to financial markets that it now will walk back.

The bond purchases have added more than $4 trillion to the Fed’s balance sheet which now stands at $8.5 trillion. Roughly, $7 trillion of which is the assets bought up through the Fed’s quantitative easing programs. The purchases helped keep interest rates low. Such provided support to markets that malfunctioned badly during the pandemic, and fueled a powerful run for the stock market.”

Previously, when the Fed began to taper their bond-buying programs, the market buckled as the “risk-on” trade reversed.

As was the case previously, Wall Street analysts quickly assumed that this time would be different despite the previous debacles.

“When Federal Reserve officials talked about pulling back on accommodative policies in 2013, anxious investors sent markets into a tizzy.

The opposite is happening now: The Fed signaled it started discussions of reducing bond-purchase programs. Investors, however, remain placid. The markets, in short, are taking everything in stride.” – WSJ

That is the case for now. Now let’s take a look at how the potential impact of the Fed’s announcement to taper may possibly be good news for the bond market.

Global Liquidity Is Slowing

While Wall Street is eternally optimistic, there are two problems with the view the Fed can cut liquidity without consequence.

To begin with, it isn’t just the Fed cutting liquidity. Liquidity globally, from both Central Banks and Governments, has started reversing heading into 2022.

The hope, of course, is the economy is now strong enough to “stand on its own” without ongoing support. But, as discussed in “Reversion To The Mean,” economic growth is already falling well below expectations.

Over the next few quarters, the year-over-year comparisons will become much more challenging. Q2-2021 will likely mark the peak of the economic recovery.

GDP annual change fed taper

During each previous QE cycle, as soon as the liquidity flows slowed or stopped, undesired outcomes were close by.

Awaken The Bond Bull

The recent “pop” in rates, when the Fed announced they will taper bond purchases, was not surprising. Such is the expectation if one of the primary sources of bond-buying is getting removed.

“In theory, tapering should lead to higher interest rates. By tapering its bond purchases, the Fed is increasing the supply that must get absorbed by the market. Such signals that policy is becoming less accommodative.” – Schwab

However, over the last decade, a reversal in Fed policy has repeatedly provided bond-buying opportunities. In the past, rates rose during QE programs as money rotated out of the “safety of bonds” back into equities (risk-on.).

When those programs ended, rates fell as investors reversed their risk preferences.

Fed Taper QE and Interest Rates

As the Fed begins tapers, investors’ risk preferences will change as liquidity wanes. There are three reasons such will be the case.

  1. All interest rates are relative. With trillions in global debt globally sporting negative interest rates, the assumption that rates in the U.S. are about to spike higher is likely wrong. Higher yields in U.S. debt attracts flows of capital from countries with negative yields which push rates lower in the U.S.
  2. The coming budget deficit balloon. Given the lack of fiscal policy controls, and promises of continued largesse, the budget deficit will swell beyond $4 Trillion in coming years. Such will require more government bond issuance to fund future expenditures.
  3. Central Banks will continue to be a buyer of bonds to maintain market stability, but will become more aggressive buyers during each recession.”

With the current Administration and the Treasury pushing the idea of more government spending, the budget deficit is already rising, with economic growth running well below expectations. Such will foster more, not less, demand for bonds in the future and this is potentially good news for the bond market. 

Bonds May Outperform

Here is the primary point. While market punditry continues to push a narrative that “stocks are the only game in town,” such will likely turn out to be poor advice. But that is the nature of a media-driven analysis with a lack of historical experience or perspective.

From many perspectives, the absolute risk of the heavy equity exposure in portfolios gets outweighed by the potential for further reward. The realization of “risk,” when it occurs, will lead to a rapid unwinding of the markets pushing volatility higher and bond yields lower. Such is why we continue to acquire bonds on rallies in the markets to hedge against a future market dislocation.

Household equity ownership versus stock market and fed taper

In other words, we get paid to hedge risk, lower portfolio volatility, and protect capital. Bonds aren’t dead. In fact, they are likely going to be your best investment in the not too distant future.

In the short term, the market could surely rise further, especially if the Fed continues reinvesting the proceeds from their balance sheet. Such is a point I will not argue as investors are historically prone to chase returns until the very end. But over the intermediate to longer-term time frame, the consequences are entirely negative.

As my mom used to say:

“It’s all fun and games until someone gets their eye put out.”

The post Fed “Taper” is good news for the bond market appeared first on RIA.

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Economics

Coffee price prediction: where to next after hitting a 10-year high?

Coffee price has been on a months-long uptrend; hitting a 10-year high on Thursday. Tight supplies are the key driver of the commodity’s bull run. Unfavorable weather conditions and the ongoing shipping snarl-ups have contributed to the shortage. Based…

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Coffee price has been on a months-long uptrend; hitting a 10-year high on Thursday. Tight supplies are the key driver of the commodity’s bull run. Unfavorable weather conditions and the ongoing shipping snarl-ups have contributed to the shortage.

Based on the prevailing weather patterns in different coffee-growing regions, the bullish market may linger on in the coming weeks. The effects of the frost and drought that hit Brazil in the past year are still being felt. Besides, Minas Gerais, which is a key coffee-producing area in Northern Brazil, is experiencing heavy summer rains. The subsequent floods have heightened disease concerns. The La Nina phenomenon in Colombia and wet weather in Vietnam has further boosted coffee price.   

Coffee price outlook

Coffee C futures, which are the benchmark for the Arabica variety, have been on a months-long uptrend following a recovery in demand. In the past year, the coronavirus pandemic placed 1.50 at an evasive level. Interestingly, that has turned into a steady support zone since coffee price surged above it in mid-July.

Since then, it has been on an uptrend as shown via the trendline highlighted in red. Since the beginning of the year, the commodity has had its price surge by about 94.12%. On Thursday, it extended its previous gains to trade at the highest level since October 2011. Besides, since mid-September, it has been in the green for nine out of ten weeks.

In the US Intercontinental Exchange (ICE), coffee price ended the week at 2.42; down by 1%. On a daily chart, it is trading above the 25 and 50-day exponential moving averages. Based on both the fundamentals and technicals, I expect the commodity to remain in an uptrend in the coming week.

With an RSI of 73, it entered the overbought territory on Thursday after reaching a 10-year high. While it has since pulled back, it is still at the border of this zone with an RSI of 70. As such, it may start the coming week on a low before rebounding.

From this perspective, the support levels to look out for are 2.33 and the 25-day EMA at 2.20. On the upside, it will likely find some resistance along last week’s high of 2.48. Above that level, the bulls will be eyeing the psychological 2.50 and 2011’s high of 2.60. For as long as coffee price is above the resistance-turn-support zone of 2.00, the bulls will remain in control.

coffee price
coffee price

The post Coffee price prediction: where to next after hitting a 10-year high? appeared first on Invezz.

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Government

Bureaucrat’s False Promise: Take Two COVID Shots And We Will Reopen

Bureaucrat’s False Promise: Take Two COVID Shots And We Will Reopen

Authored by Mike Shedlock via MishTalk.com,

More lockdowns are underway in Europe. What happened to reopen promises?

Fury Over Lockdowns 

Global markets are reeling…

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Bureaucrat's False Promise: Take Two COVID Shots And We Will Reopen

Authored by Mike Shedlock via MishTalk.com,

More lockdowns are underway in Europe. What happened to reopen promises?

Fury Over Lockdowns 

Global markets are reeling in the wake of more lockdowns and threats of them.

The Economist (paywall) notes surge of deadly covid cases in Europe is met by popular fury over lockdowns.

The sight of 40,000 unvaccinated Austrians marching through their capital, Vienna, in recent days was troubling twice over. The tightly packed opponents of lockdown measures were at risk of spreading the coronavirus. They also threatened to stir up an already tense political situation. Karl Nehammer, Austria’s interior minister, warned that anti-vaxxers in the Alpine republic are growing more radicalised. He called the demonstration’s mood “incensed” and “aggressive”. Some protesters were extremely provocative, carrying placards likening Alexander Schallenberg, Austria’s new chancellor, to Josef Mengele, the sadistic physician at the Nazi concentration camp in Auschwitz.

The protesters were marching against Austria’s increasingly tough measures against anti-vaxxers. On November 22nd the government imposed a full lockdown once again, to last for at least ten days. That compels Austria’s 9m people to hunker down at home, leaving only for work, essential shopping and exercise. Austria is also the first Western democracy to make covid-19 vaccinations mandatory for all, starting on February 1st 2022. “For a long time—maybe too long—I and others assumed that it must be possible to convince people in Austria to get vaccinated voluntarily,” said Mr Schallenberg when he announced his “very difficult” decision.

Let Our Guard Down

The Washington Post (paywalled) reports ‘We let our guard down’: Frustrated Europe heads into second pandemic winter

Life was finally starting to feel normal. An online flier for an October party in this Belgian beach town cursed the coronavirus and invited people to dance and drink again, to “get your clacker back from the attic” and kick off Carnival season.

Hundreds attended that event and another Carnival party the next night. Most of the town is vaccinated, and people were required to show proof, or a recent negative test, to enter. But it wasn’t enough. Coronavirus cases spiked the week after. Officials worried about pressure on the local hospital. And soon the town found itself under semi-lockdown once more.

As Americans catch up with family and friends this holiday week, with some trepidation about enduring risk, Europe is facing another wave of the virus — and a gloomy and frustrating second pandemic winter.

New Heavily Mutated Covid Variant

CNBC reports Belgium Confirms Case of New, Heavily Mutated Covid Variant.

The emerging variant arrives in Europe amid an already devastating Covid surge linked to the delta strain. Europe saw more than 2.4 million new Covid cases over the week ended Nov. 21, an increase of 11% from the previous seven days, according to the WHO’s most recent epidemiological update.

Europe represented 67% of all Covid cases reported globally during that span, the WHO measured.

Belgium tightened restrictions this week to stop the spread of the virus, requiring people to work from home four days a week through the middle of December. Austria started its fourth lockdown of the pandemic on Monday, with a nationwide vaccine mandate scheduled to take effect on Feb. 1. Chancellor Alexander Schallenberg has said that the lockdown will last for at most 20 days.

New Lockdowns and Restrictions

  • Slovakia declared a two-week lockdown on Wednesday. People can leave home for a limited number of reasons, including buying groceries, going to work and to school, and getting vaccinated. And starting next week, all workers will have to show they’ve been vaccinated, recovered from the coronavirus or had a recent negative test.

  • Austria, imposed a lockdown that will last at least 10 days and up to 20. 

  • The Netherlands ordered bars and restaurants to close at 8 p.m.

  • Belgium has mandated that all but essential employees work from home four days a week. Belgium also reinstituted an indoor mask mandate this month.

  • Merkel pushed for a German lockdown as its death toll passed 100,000.

  • The U.K.  halted flights from six countries in the region, and European Union member states have collectively agree to pause travel to and from southern Africa.

  • Singapore banned flights from southern Africa

  • Japan is increasing border controls for travelers from the region.

  • Italy requires proof of vaccination or recovery for access to many parts of public life. Vaccination restrictions fcome into effect on December 6 and last until January 15.

Mess in Germany 

Eurointelligence comments on Germany's Federal Virus.

The massive outbreak in Covid-19 hospitalizations and fatalities in Germany raises disturbing questions about who is in charge. Having failed to achieve the right levels of vaccine procurement early on during the pandemic, the German authorities have repeated the same mistake. They did not procure the booster shots they needed. They have not set up a network of vaccination centres to deliver them rapidly.

As of this weekend, only 11.4% of the population has received booster shots. It is very difficult to get an appointment. Only doctor's surgeries are allowed to deliver them. The network has not been expanded to pharmacies. 

So why is this happening again? The answer is that the German healthcare system, well-funded as it is, is not set up for a pandemic, or indeed for public health emergencies in general. This is a publicly-funded, but privately run, healthcare system. The states are in charge of the local healthcare administrations and hospitals. Health insurance is a matter for the federal government, but states supervise the health insurance companies. What can possibly go wrong?

Message From German Stats

In Germany, over 45% of people hospitalized for Covid-19 are fully vaccinated.

That last stat sounds more shocking than it really is. Germany is 68% fully vaccinated. Thus 55% of the hospitalizations cases come from 32% of the population.

Only 11% of Germany received a booster. Given vaccinations wear off, the proper take away is get a booster, not flout the stats. 

Vaccine Mandate US

In the US, the Biden administration imposed a vaccine mandate vis OSHA on companies with more than 100 employees.

On November 15, I noted Appeals Court Blocks Biden's Vaccine Mandate in a Blistering Rebuke

The rebuke was a huge attack on the competence of Biden's mandate. My position, upfront was the mandate was unconstitutional. 

Given multiple attacks on the mandate, jurisdiction, the case moved from the 5th Circuit to the 6th Circuit, where Biden doubled down. 

On November 23, I commented Biden Doubles Down on Vaccine Mandate With Another Circuit Court

The justice department files an emergency motion with the 6th circuit court arguing the 5th circuit's postponement of the OSHA vaccine mandate was unjustified

I strongly suspect the 6th Circuit will reaffirm the previous ruling.

Meanwhile, protests or not, mutations go on and on. 

What Covid Lockdowns and Disruptions in Europe Signal to the U.S.

False Promise

"Take two shots and we will reopen society. That turned out to be a false promise."

It's been one false promise after another, by Dr. Fauci, by Trump, by Biden, by Merkel, globally everywhere.

Trust is essentially gone and rising protests are proof.

*  *  *

Like these reports? If so, please Subscribe to MishTalk Email Alerts.

Tyler Durden Sat, 11/27/2021 - 13:45

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Economics

How Did Friday’s Selling Compare To March 2020 Selling? My Takeaways

News that a new COVID-19 variant has surfaced in South Africa spooked global equity markets on Friday. Was it an overreaction and an opportunity to buy some of your favorite stocks cheaper? Or is the start of a much deeper, panic-driven selloff. Unless…

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News that a new COVID-19 variant has surfaced in South Africa spooked global equity markets on Friday. Was it an overreaction and an opportunity to buy some of your favorite stocks cheaper? Or is the start of a much deeper, panic-driven selloff. Unless you're a scientist with inside knowledge, I don't think it's possible to know. There are so many questions right now that haven't been adequately answered and may not be answered for several days or weeks. Among those questions would be (1) rate of transmissibility, (2) efficacy of current vaccines against the new variant, (3) the new variant's infection fatality rate (IFR), and so forth. Without this information, it's impossible to try to determine what steps countries around the globe may need to take.

When the delta variant was first studied, it was found to be much more contagious and now the World Health Organization (WHO) estimates that 99% of the world's COVID cases are the delta variant. The worst case obviously would be that this new variant is even more contagious and that vaccines are proven to be ineffective protecting against it. But if global markets continue to panic and selloff as they did on Friday and the new variant poses less risk than first thought, clearly a major global rally could follow.

So what do we do?

Well, rather than search media outlets looking for financial advice, which proved to be absolutely worthless during the height of the 2020 pandemic (remember the Great Depression 2.0 forecasts?), I'd suggest we focus instead on what Wall Street is doing with their money. What sectors and industries are performing poorly on a relative basis (suggesting more exposure to an extended selloff)? Also, which sectors and industries actually performed better during the day on Friday, which would impact their respective AD lines. If you recall, the AD lines were, in my opinion, the best technical indicator throughout 2020 as they helped us identify which areas were being accumulated vs. distributed during the pandemic.

So let's take that approach again as we analyze Friday's action.

It's Deja Vu All Over Again

When I looked at major index and sector performance on Friday, the ranking was nearly identical to the period from February 19, 2020 (market top before panicked selling began) through March 23, 2020 (subsequent low on the S&P 500).

Energy (XLE), financials (XLF), industrials (XLI), and real estate (XLRE) were the bottom 4 sectors during the panicked selloff in 2020 and those 4 were again among the weakest on Friday. Meanwhile, consumer staples (XLP) and health care (XLV) were first and second (though reversed) both during the initial crisis in 2020 and again on Friday.

The order of performance on our major indices were almost identical.

Based on this quick analysis, if we continue to see a COVID-related selloff, I'd most definitely be expecting those bottom groups to continue to lead the selloff. If you have significant exposure in Friday's weakest sectors and industry groups, then I believe your risk is higher as we move into next week.

The Outliers

Not all industry groups conformed with last year's performance ranking. Those that remained relatively strong on Friday (key word here is relative as it wasn't a good day for many groups) and were also relatively strong back in March 2020 included the following industry groups:

  • Gold mining ($DJUSPM): #1 in March 2020 and #2 on Friday, or 1 and 2 (out of 104 industry groups)
  • Mining ($DJUSMG): 3 and 3
  • Mobile telecom ($DJUSWC): 4 and 6
  • Biotechnology ($DJUSBT): 8 and 1
  • Toys ($DJUSTY): 9 and 4

These were the only 5 groups that were in the Top 10 in March 2020 and on Friday.

Then there's the flip side - those industry groups that were weak in both periods:

  • Recreational Services ($DJUSRQ): 103 and 104
  • Oil equipment & services ($DJUSOI): 101 and 96
  • Coal ($DWCCOA): 100 and 98
  • Airlines ($DJUSAR): 99 and 103
  • Aerospace ($DJUSAS): 97 and 97

These were the industries that were in the Bottom 10 in both periods. I'd definitely avoid all of these groups in the very near-term until we get more clarity. It may mean you miss some upside, but steering clear will eliminate the significant risk that exists if this new COVID variant proves to be more problematic than the delta variant.

What About Accumulation/Distribution (AD Lines)?

We saw very weak futures overnight on Thursday and our major indices gapped down significantly. But where did Wall Street see opportunity to accumulate? Well, one way to gauge that is to compare Friday's closing price to its opening price. It makes common sense that a higher close means there were more buyers than sellers throughout the day. The opposite is true if the close was below the open.

I'll be honest. I wasn't expecting the results that we actually saw. For instance, energy (XLE) was clearly the worst performing sector on Friday, but it rallied strongly in the afternoon and its AD line neared a 3-month high:

I have to say that energy behaved quite well during the day on Friday after a rather inauspicious start. The hammer at support, along with that rising AD line provides hope for a group that I said to avoid earlier in this article. We can't ignore that volume because it came on extremely heavy volume. Nearly 45 million shares changed hands, which wasn't the biggest volume day of the year. But we need to keep one thing in mind. The market closed early at 1pm ET on Friday. Had we been open a full day I believe the XLE may have traded its heaviest volume of the year. That, combined with the huge reversal, could signal a major bottom here. We'll have more days ahead that will provide us more clues, but based on my AD analysis, I'd turn bullish the group if I knew we weren't going to wake up to more negative COVID news on Monday morning. But that's the world we live in right now and the uncertainty is almost paralyzing.

There was one industry group on Friday that showed even greater signs of accumulation, gaining roughly 3.5% in the final 90 minutes of trading. The S&P 500 was flat during this same 90-minute period and the NASDAQ actually lost some ground, making this industry group's recovery stand out even more. I'm featuring the group and one of its component stocks to keep an eye on in my FREE EB Digest newsletter on Monday morning. If you're not already a free EB Digest subscriber, you can subscribe HERE by providing us your name and email address. There's no credit card required and you may unsubscribe at any time.

Happy trading!

Tom


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