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Monday, October 25, 2021

Do Not Fight the Tape, Always Take What the Market Gives


FLASH: Investors now have no doubt that the Fed will cut interest rates on 31 July for the 1st time in more than 10 years and it is the beginning for the path to near Zero, with no recession in sight.

For weeks, money managers have bet on a 25 bpts rate reduction in July, CME Group’s FedWatch tool shows, and while chances of a 50 bpts cut briefly shot up to 60% in mid-July, they have settled back at around 25%. But the Fed may surprise this week.

But interest rates may not be the only item on the to-do list during the 2-day debate around the FOMC’s table. Currently, the Fed sells off billions of dollars of maturing bonds from its balance sheet each month without reinvesting the proceeds.

That balance sheet reduction, aka Quantitative tightening has since October 2017, whittled down a bit of what had been $4.25-T of bond holdings which the Fed accumulated between Y’s 2008 and 2014.

The program is set to end in September, but with only a month to go, The Big Q is why wait?

Many Fed policymakers are leery of having just 2 policy tools, they are interest rates and balance sheet size, working at cross-purposes. Top Wall Street firms, ‘Goldie’ among them, are in the end-it-now camp.

The ECB is expected to go in all-guns-blazing with a variety of stimulus measures to ward off the curse of “Japanification” — depressed growth, near-Zero inflation and low or negative interest rates. But in Japan, which has been trying for years to extricate itself from that situation, policymakers have an even tougher job.

The Bank of Japan is divided on whether to ease policy or hold off. A rate cut would seem to make sense given Japan’s lessening exports, exposure to a slowing China, unwelcome currency strength, and low inflation of course.

Japan’s banks are already agonizing over negative interest rates. And many argue it may not be wise to dip into an alarmingly bare tool-kit and use precious ammunition now, only to see the JPY swiftly reverse any post-cut falls when the Fed lowers rates.

From that outlook, the ECB standing pat this month gives the BOJ some breathing space, it may use words rather than action to show it will not lag when it comes to easing policy.

This is a busy central banking week.

The BOJ and Fed meetings will be followed by the Bank of England on 1 August. It is expected to keep interest rates on hold as policymakers wait for some clarity on BREXIT.

But the meeting will be watched for policymakers’ assessment of the British economy’s current downturn, and how they might respond should the UK exit the EU without a transition deal under PM Boris Johnson.

GBP has fallen more than 5% since May on fears of a disorderly no-deal BREXIT.

PM Boris Johnson, less than a week into the job, has already clashed with Brussels after he again called for the withdrawal deal to be rewritten and vowed to take Britain out of the EU on 31 October no matter what.

BoE policymakers must also contend with stuttering growth. Some analysts reckon the economy shrank in Q-2, another poor showing this Quarter would tip it into recession.

Markets now price in a 75% chance of a 25 bpts cut in interest rates in Y 2019 from the current 0.75%, a reversal from a few months ago when a rate hike was expected by only some.

The BoE may resist the global monetary easing tide and push back against rate-cut expectations. That would allow GBP to find support near 27-month lows of below $1.24 unless the deadlock between Brussels and London takes another turn South.

US and Chinese chief trade negotiators will meet again Tuesday in Shanghai in what will officially be their 12th round of meetings to try to diffuse a year-long trade dispute that has eroded China’s economy.

With President Trump’s November 2020 re-election campaign not in full swing yet and Wall Street is continuing to post record highs, and President Trump is not feeling pressure for the ‘big beautiful deal’ he declares, but the markets want something more, the Bull is running and hungry.

What they do not want to see is the additional $300-B of punitive tariffs on China coming back to the table, followed by a tit for tat retaliation from Beijing.

World stocks have risen 8% since early June. That is down to central banks promising to go easy on policy but there also have not been many trade war headlines to sour the mood. A bad meeting may well disrupt all that.

ECB Chief Mario Draghi reckons the risk of economic recession in the bloc is “pretty low”. Europe looks likely at the moment to dip into an earnings recession.

Refinitiv data shows corporate profits are on track to decline for the 2nd Quarter running for the 1st time since mid-2016.

With the 1st lots of Q-2 results are out, with FY profit growth is now seen rising just 3%, whereas early-2019 forecasts put it at just under 10%.

Markets seem to be taking it in their stride. They have been rewarding companies with share price gains of 1.5%-3% if profits beat or meet already lowered estimates, while those falling short are not being penalized as much.

Nearly a 20% of Eurozone companies have reported Quarterly earnings so far and nearly 50% them have beaten analysts’ predictions on lowered estimates of the earnings season.

Just 2 months ago, analysts expected European companies to report 3.6% profit growth, now they see a half-percent decliners

Meanwhile, US corporations appear in a much better position, as 75% of the S&P 500 companies have beaten The Street’s earnings estimates so far this season, with post-earnings market reactions similar to Europe.

HeffX-LTN’s overall technical out look in the 3 major US stock market indexes is Bullish to Very Bullish at the week ending 27 July 2019.

On Gold: The SPDR S&P 500 ETF Trust (NYSE:SPY) has rallied 37.5% in the past 3 years, while the SPDR Gold Trust (NYSE:GLD) has lagged, gaining just 5.7% in that frame.

Now comes Bridgewater Associates hedge fund manager Ray Dalio, who has recently said gold could be gearing up for a “Gold Bug” decade of returns.

Paradigm Shift: in a post reported here last week, Mr. Dalio discussed paradigm shifts in financial markets. He said these shifts tend to occur once every 10 yrs or so, and the price of gold tends to correlate with the shifts.

Gold outperformed in the 1970’s after President Richard Nixon took the US off the gold standard. In the 1980’s and 1990’s, gold lagged while the S&P 500 gained 2,500%. In the early 2000’s prior to the financial crisis, gold tripled in value. From Y’s 2008 to 2010, gold prices gained just 10%.

Today, Mr. Dalio sees another paradigm shift in global economics.

He said massive sovereign debt loads will ultimately force central banks to print more paper money, which will make dealing with their debt loads more manageable; aka devalue the fiat money.

Given gold is a global store of value and has a limited supply, he said investors and central banks will likely view it as an effective hedge against currency inflation.

Mr. Dalio said the world is currently positioned extremely long on “risky assets,” such as stocks, leveraged private equity and venture capital. He said these assets are providing historically low returns relative to cash.

“I think these are unlikely to be good real returning investments and that those that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold,” he wrote. “I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.

True, gold pays no dividends, but it is an effective hedge Vs USD. In that context, both Shayne and I believe Mr. Dalio’s Bullish thesis on gold makes a whole lot lot of sense.

We are on the look out for a well managed junior US miner where we will get huge leverage on a long life trend strike in the US.

We agree that the world’s central banks are the natural buyer, they have begun to increase their holdings and have a lot of power to add to this trade.

In the past 3 months, Mr. Dalio’s thesis is playing out on the market. The GLD fund is up 11.9%, while the SPY ETF is up just 2.7% overall.

HeffX-LTN’s overall technical outlook for GLD is Bullish too Very Bullish in here, all of our Key indicators are flashing Very Bullish.

Have a terrific week.

HEFFX has become one of Asia’s leading financial services companies with interests in Publishing, Private Equity, Capital Markets, Mining, Retail, Transport and Agriculture that span every continent of the world. Our clearing partners have unprecedented experience in Equities, Options, Forex and Commodities brokering, banking, physical metals dealing, floor brokering and trading.

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