Archives of “May 4, 2021” day

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Fed’s Kaplan repeats call to “at least start discussing” taper

  
  Analysis

Kaplan spoke with MarketWatch

Kaplan spoke with MarketWatch
Dallas Fed President Kaplan has been busy lately, doing a media tour for his hawkish turn on rates.
Today’s edition is with MarketWatch, where he said something he’s said before:
“I think it will make sense to at least start discussing how we would go about adjusting these purchases and starting having those discussions sooner rather than later,” Kaplan said.
Kapan said he didn’t know if that discussion about tapering would start at the June 15-16 FOMC meeting or later, saying it would be a ‘group decision.’
It’s a good time to be watching Fed Presidents to see if this starts a trend, at least among the hawks. For me though, I think it can be safely ignored until we hear it from a Fed Governor.
Another interesting comment from Kaplan was on inflation and supply-chain bottlenecks. He said business contacts are less confident that it’s transitory.
“A number of them are a little less sure now. The time frame is getting pushed back,” he said.

European shares follow the US stocks lower. German Dax leads the way

  
Analysis, Global Indices

German Dax falls -2.5%

The major European indices all fell led by the German Dax which fell 2.5%. The Spain’s Ibex and UK FTSE 100 were positive at the start of the North American session, but has moved solidly into negative territory at the close.

The provisional closes are showing
  • German Dax, -2.5%
  • Frances CAC, -0.9%
  • UK’s FTSE 100, -0.7%
  • Spain’s Ibex, -0.7%
  • Italy’s footsie MIB, -1.8%
Looking at other markets as European/London traders look to exit:
  • S&P index is trading down -60.46 points or -1.45% at 4132.20. The index is making new session lows
  • NASDAQ index -398 points or -2.86% at 13497.30. It too is trading at session lows
  • Dow is down -273 points or -0.80% at 33841. The low price reached 33765.68.
In the US that market, yields are mostly lower with the two-year up 0.2 basis points.
US yields
In the European debt market, the benchmark 10 year yields all fell with the Italian yield down -1.1 basis points. The UK 10 year was down -4.6 basis points.

We got a taste of what will happen when Powell talks about raising rates

  
  Analysis

No idea why Yellen went down this road

No idea why Yellen went down this road
I think what Yellen was trying to say was that the heavy fiscal stimulus that she’s advocating for will result in higher rates because you have more Treasury supply and a hotter economy.
That’s a fair point but she has to understand that she’s the former Fed chair and by phrasing it like she did, she undercuts Powell’s messaging. It’s such an amateurish delivery that it’s hard to believe it was an accident. But at the same time, there’s absolutely no reason to deliver that kind of message now.
“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy.”
In any case, after the initial market hiccup, there is some dip buying here. At the end of the day, Yellen isn’t the Fed chair and her comments aren’t advocating for a hike, but rather saying that’s the natural result.
BTFD is still alive.
This is also a taste of how ugly it will get whenever Powell mentions a taper or a rate hike. The market is still comforted because that appears to be some time away but everyone has Jackson Hole circled in late August as the time when taper talk will start. Maybe telegraphing it that far away smooths the process but at some point, Powell is going to have to do something the market doesn’t like and with all the leverage and exuberance, that will be a very ugly day.

Yellen: Rates might have to rise to keep the economy from overheating

  
  Analysis

Comments from the Treasury Secretary at event held by The Atlantic:

Comments from the Treasury Secretary at event held by The Atlantic:
  • Biden is addressing long-standing problems in the economy
  • Marginal tax rates are much less effective in influencing growth than many thought
  • Expect to be in an environment of low interest rates for some time but still need to make sure deficits remain manageable
  • Little evidence of a burst of investment after Trump tax cuts
This comment has sent equities to the lows of the day and the US dollar sharply higher.
Yellen is no longer Fed chair and Powell won’t like this line of talk. It’s puzzling that she would go down this road.

Here’s the full quote:

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy.”
She seems to be talking about market-driven rates but it’s a bizarre comment from someone who should definitely know to stay in her lane.

Dollar holds firmer to start the session

  
Analysis, Forex

Dollar extends its advance to start European morning trade

The greenback is holding modest gains across the board to kick start the session, paring its drop from yesterday. EUR/USD is trading down to the lows at 1.2018, closing in on the Monday lows around 1.2013-15 at the moment:

EUR/USD D1 04-05
Sellers are keeping near-term control and the push back below the 100-day moving average (red line) provides more conviction for an added downside push, potentially to test the 1.2000 handle as London traders return after the long weekend.

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Italian FTSE and the Draghi effect

  
  Analysis

Draghi may help lift the Italian FTSE

Draghi may help lift the Italian FTSE

Last week I came across a piece on Bloomberg making a case that the Italian FTSE is a decent place to make a play on the Italian stock market. The reasons were as follows:

  1. Mario Draghi’s plan to improve the Italian economy is boosting its undervalued shares. Draghi went to Parliament last week and gave some details of his €248 Billion plan. This plan is mainly due to be finance by the EU’s post pandemic recovery fund. According to Bloomberg even only around half of the planned reforms would attract investor capital. This would particularly boost small and mid caps.

According to Antonio Amendola. Portfolio manager at Acomea Sgr, ‘Italy really has an epochal opportunity with the Recovery Plan. Directly for the obvious investments it will make, but also indirectly for the necessary reforms.

2. The Italian FTSE is trading at a relative discount to it’s European peers. The current FTSE MIB (Italian FTSE) forward price to earnings ratio relative is about 0.77%. This is just shy of the multiyear lows hit during the COVID-19 crisis of ~0.70%.

Correction in stocks due or can gains continue?

The argument against this is the feared correction in stocks that is generally feared. The summer months would be the obvious time for a correction. However, aside from the obvious it is hard to pin point a correction in stocks. Any readers with some top tips please leave a message in the comments below. One perspective I have found helpful recently has been from Ray Dalio. He asks the following six questions:

  • How high are prices relative to traditional measures?
  • Are prices discounting unsustainable conditions
  • How many new buyers (i.e., those who weren’t previously in the market) have entered the market?
  • How broadly bullish is sentiment?
  • Are purchases being financed by high leverage?
  • Have buyers made exceptionally extended forward purchases (e.g., built inventory, contracted forward purchases, etc.) to speculate or protect themselves against future price gains?

You can read his full piece here.

RBA leaves cash rate unchanged at 0.10% in May monetary policy decision

  
  Analysis

Latest monetary policy decision by the RBA – 4 May 2021

Latest monetary policy decision by the RBA - 4 May 2021
  • Prior 0.10%
  • 3-year bond yields target 0.10%
  • At its July meeting, RBA to consider whether to retain the April 2024 bond as the target bond for the 3-year yield target or to shift to the next maturity, the November 2024 bond
  • RBA not considering change to the target of 10 basis points
  • At the July meeting, RBA will also consider future bond purchases following the completion of the second $100 billion of QE purchases
  • Global economic recovery remains uneven
  • Australian recovery has been stronger than expected and is forecast to continue
  • A pick-up in inflation, wages is expected but likely to be only gradual and modest
  • RBA will be monitoring trends in housing borrowing carefully
  • Australian dollar remains in the upper end of the range of recent years
  • RBA committed to maintaining highly supportive monetary conditions
  • RBA will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range; this is unlikely to be until 2024 at the earliest
  • Full statement
No changes to key policy with the only key takeaway being that the RBA is putting a firm timeline on its decision to shift the yield curve control focus. That said, the July meeting is when they will “consider” but given such communication, it is preempting the market that they should make a decision to shift to November 2024 bonds then.
Besides that, there isn’t much else as the RBA reaffirms its pledge to keep easy policy in place and also saying that they can do more if needed with regards to QE.
AUD/USD had a 10-pip whipsaw but is keeping lower again at 0.7745 – little changed from before the decision/statement was released.
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