Reactive Fed, QE and Socialism

A reactive Federal Reserve has really boxed itself into a corner.

The Fed is known to change tunes as per market capitalization. For instance, the Fed scaled back its rate hike forecasts in December 2018 as markets began pricing a rate pause in 2019.

The Fed then signaled a rate pause in the first quarter of this year, following which markets began pricing in rate cuts and guess what, the central bank removed word “patience” for its forward guidance this week, setting stage for a rate cut later this year.

In fact, money markets are fully priced for a 25 basis point rate cut in July, while few in markets believe the Fed would cut rates by 50 basis points next month. A significant majority out there sees at least 75 basis points rate cuts over the next 6-9 months.

This sounds like a simple and effective strategy… just give the market what it want, so there is no fear of missing or beating expectations and resulting instability or volatility in the financial markets.

After all market are rational right?

I believe markets are always irrational and by merely following the irrational entity, the Fed is now stuck between the rock and a hard place.

As noted earlier, the market has priced in at least 75 basis points of rate cuts for the next 2-3 quarters.

The US stocks are at record highs with the S&P 500 reporting more than 17% gains on a year-to-date basis.

If the Fed doesn’t deliver, equities could tank, leading to financial market instability. On the other hand, if the Fed delivers rate cuts, we could see a sell the fact pullback in stocks.

More importantly, it would further confirm that Fed is more than willing to comply with market expectations and so, with every set of weak Us/global economic data and/or episodes of geopolitical tensions, investors will price in more aggressive easing in turn putting more pressure on the Fed to act.

The self feeding cycle would end up with Fed pushing rates into negative territory.

Hence, I feel the Fed should out its foot down and avoid cutting rates at least till the S&P 500 is holding above the lows near $2,350 seen at the start of the year.

QE and Socialism

Drawing parallels between quantitative easing and socialism is quite easy. In the latter, the state makes sure that every citizen has access to basic needs irrespective of their contributions to the GDP.

With QE, the economy gets cheap money, meaning corporates with low credit rating and the ones with high credit ratting can borrow at same rates. Put simply, QE blurs the line between best performer and worst performers.

No wonder, productivity continues to deteriorate in most advanced nations. These countries run capitalist models but their central banks implement QE, which is socialist at heart.

 

 

 

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Nifty Technical Analysis: holding 50-hour EMA

India’s Nifty 50 is trading in the red, but is defending the 50-hour EMA 10,445.

The bullish hammer reversal confirmed on Friday indicates scope for a corrective rally toward 10,700-10,800 in the next few days.

Therefore, I would be a buyer on the dips. The bullish outlook would be invalidated if the index closes today below the downward sloping  5-day EMA.

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Oil on slippery floors

Brent oil is looking south, having witnessed a bear flag breakdown on the hour chart.

As of writing, the front-month contract is changing hands at $84.26 per barrel. The RSI o the hourly and dailies is biased toward the bears. Notably, the daily RSI has rolled over from the overbought territory and has breached the rising trendline.

I would want to sell oil for re-test of $82.64 with stops above $85.14.

The broader outlook would still remain bullish as the 50-day, 100-day and 200-day are sloping upwards and are located one above the other.

 

 

 

 

Dr. Copper is Flexing Muscles, Eyes break above Dec 2017 high

Copper has gained 6.3 percent this week and looks set to close above $3.30 (July 2014 high). It would only bolster the bullish technical setup, as indicated by the inverse head-and-shoulders breakout, solid rebound from the falling trend line in March and a rise above the ascending trendline.

Above $3.30, next big resistance is seen at $3.4617 (Dec. 23, 2013 high).

An uptick in copper prices is usually considered a positive sign for the global economy and also for the Australian dollar.

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