Red warning lights from the fixed income market

Red warning lights from the fixed income market

21. juni 2021 fra CarlsquareLæsetid: 8 minutter

It is difficult to describe what is happening in the market right now, apart from that the Fed seem to have lost some control. We will go through step by step what we think has happened. But at the time of writing, most of it is speculation. The market hates uncertainty, which weighs heavily. It may be a major buying opportunity that is being created, but just as always, timing is essential.

As shown in the graph below, the S&P500 index has fallen through three support levels of moving averages MA20, MA50 and the rising trendline over the course of three days.

Note: Past performance is not a reliable indicator of future results.

The two-hour graph shows a crime below MA200 for the first time in a long time. From a technical point of view, a possible move to levels between 4 000 and 4 050 may be in the cards:

Note: Past performance is not a reliable indicator of future results.

In the five-year weekly graph below, one can also see how the index closed last week just below EMA9:

Note: Past performance is not a reliable indicator of future results.

This movement came after it emerged during the Fed meeting on Wednesday 16 June that several members believe in an earlier interest rate increase than before. As a spice to the mash, then the Fed member Bullard went out on Friday 18 June and fired several missiles. He said he was one of the Fed members who believes in an interest rate hike in late 2022. He also believes that the current inflation trends will fade away. Historically, Bullard has often been a dissident against the Fed´s policies. Nowadays he is seen as a dove, which got his message that he belongs to those who believe in an earlier interest rate increase to give extra effect.

Bullard is one of the smarter and most experienced in the Fed. His message is likely to be endorsed by Fed Chairman Jerome Powell. It is only fair to state that the Fed´s message creates more anxiety than calm, which has otherwise been paramount before, including the truth. As you might know, it is part of the central banks’ undisclosed mandate not to have to stick to the truth.

So, what is really going on underneath?

The Federal Reserve Balance Sheet expansion compared to the S&P500 index price development

Note: Past performance is not a reliable indicator of future results.

In terms of the Fed´s support purchases in the blue line, they only increase and the stock market in red follows. We were among the first to discover this pattern in 2009. Today, it is common to refer to central banks’ support purchases as a share-price influencing force, but this has not always been the case. Most people now expect the support purchases to level out this autumn to be replaced by a first interest rate increase in late 2022 or 2023.

Fed´s total balance sheet compared to overnight Reverse Repurchase Agreements

Note: Past performance is not a reliable indicator of future results.

The problem seems to be in the red line. We have shown it a couple of times this spring. These are the Fed´s Reverse Repurchase Agreements. In simple terms, the banks’ ability to place liquidity with the Fed against collateral. It is a way for banks to get rid of excess liquidity that they cannot handle. We have previously mentioned that the Fed has squeezed so much money into the system that the market is saturated with liquidity.

The interesting thing is that these repurchases in volume exceed what the Fed buys in the market, which means that the Fed is currently reducing liquidity! We see the same trends in China. Overall, this is stock market negative.

The Fed seem to have ended up in a dead end. The problem is that the above is just a theory based on speculation.

Note: Past performance is not a reliable indicator of future results.

Alhambra Investments has compiled the graph above. It shows how US interest rates peaked and were then followed by mass repurchases. No one except the central banks themselves and the top directors of the large investment banks probably know what is going on. It is strangely silent with initiated comments based on real facts. We must, like everyone else, sit in the stands and try to act on what the graphs show. The history since 2008 is that all types of market corrections like the one we are going through right now, create buying opportunities. It is just a matter of catching the falling knife at the right time…

The nerves seem to be on the outside of the US society, now that the country has a new President.

Source: https://www.bbc.com/news/av/world-us-canada-57507237

An impressively tough hearing of CNN’s Kaitlan Collins ended with President Joe Biden losing his temper and responding that “If you do not understand this, then you have the wrong job”. He later apologized, but the line change shows that the honeymoon for Joe Biden is over.

Fed Chief Powell seems to long away from his job.

Somehow, the Fed and Janet Yellen, who oversee US finances, will want to buy us out of the crisis via financial support. If nothing else helps, they can always buy shares directly in the market, although they will call it something fluffier.

Percent of months in which the S&P500 index closed higher from 2002 to 2021

Note: Past performance is not a reliable indicator of future results.

Do not forget that June is historically a weak stock market month. The patterns are usually that the summer months are cool, September give a bigger dive when the pros return from their summer vacations and want to create some action. After that, the stock market usually bottoms out somewhere in October-November.

In terms of the weekly graph, we have a historically incomparable long stock market rise behind us. As earlier mentioned, the S&P500 index has still not broken EMA9.

S&P 500 index performance since Trump was elected US President in November 2016

Note: Past performance is not a reliable indicator of future results.

But a large sector rotation can be seen. We have said several times that the tech sector is in the spotlight again. Below, you can see how value shares (dividends) can be swept against growth shares, which are mainly IT shares.

VUG (Vanguard Growth ETF) compared to VTV (Vanguard Value ETF)

Note: Past performance is not a reliable indicator of future results.

The 10-year US government bond yield (below) has broken below 1.5 percent. You must listen to the fixed income market. It has never bought the narrative of a sharply rising inflation that the stock market has dragged on for several months. Rather, it looks as if the fixed income market has noted the strong recovery after Covid 19 but is more objective in discounting that the society will soon return to normal conditions. It will be a long journey…

Note: Past performance is not a reliable indicator of future results.

That tech has been the winner (or at least not affected in a similar manner) of this can be illustrated by Nasdaq 100 that is currently trading around its previous top, compared to S&P 500 that is fighting to hold its short rising trend:

Note: Past performance is not a reliable indicator of future results.

Nasdaq, 5 years graph

Banks are on the opposite side being hit hard by falling interest rates. Note how EM9 as well as MA20 was broken last week:

KBW Nasdaq Bank Index

Note: Past performance is not a reliable indicator of future results.

The big rotation also comes from the USD. We have warned several times that it looks like the USD has created a bottom. But the rise of the USD in the last three days must be among the strongest in history. Until the rise in USD fade, the stock market will not be able to recover. The USD will therefore give the earliest signal when going against the market.

Below is the currency pair EUR/USD. As shown the pair is trading at Fibonacci 23,6. A break and 1,17 may be next. In case of a bounce (preferred by the stock market), Fibonacci 38,2 at 1,185 serves as the first level of resistance:

Note: Past performance is not a reliable indicator of future results.

In the EUR/USD weekly five-year graph below, one can see how the currency pair also closed last week close to another support in share of a rising trend line. With bearish glasses on, one can also view this trendline as the neckline of a head-and-shoulder pattern:

Note: Past performance is not a reliable indicator of future results.

Like most commodities, the copper price is largely affected by the development in USD. The price of copper has broken down under its wedge. A price of USD 4.0 per contract could be next:

Note: Past performance is not a reliable indicator of future results.

In the weekly five-year graph for copper, last week ended below MA20 meaning that the sharper short-term rising trend has been broken.

Note: Past performance is not a reliable indicator of future results.

A declining copper price is bad news for Swedish Boliden share. Is MA200 next?

Note: Past performance is not a reliable indicator of future results.

Five-year weekly graph:

Note: Past performance is not a reliable indicator of future results.

If the USD continues to rise, emerging markets such as EMBs (an Emerging Market Bond ETF) will be affected.

EMB iShares JP Morgan USD Emerging Markets Bond ETF Nasdaq

Note: Past performance is not a reliable indicator of future results.

EMB weekly, five years:

Note: Past performance is not a reliable indicator of future results.

On the other hand, there are a few winners from last week. The Amazon stock is one of them. However, note the scary doji that was created on Friday 18 June:

Note: Past performance is not a reliable indicator of future results.

In the weekly five-year graph, one can see how Amazon is testing the ceiling of the neutral trend channel. Also note how MACD has started to trend upwards:

Note: Past performance is not a reliable indicator of future results.

The Swedish OMXS30 index has managed the sector rotation pretty well. A weaker SEK against the USD as well as the euro may be an explanatory factor. The index closed Friday’s trading 18 June at MA50 that needs to hold. Giving a continued sector rotation and falling interest rates, OMXS30 may be in trouble giving the index composition:

Note: Past performance is not a reliable indicator of future results.

In the five-year weekly graph, one can see how the index is still supported by EMA9. Note however that MACD has generated a weak sell signal:

Note: Past performance is not a reliable indicator of future results.

The five-year weekly graph for DAX looks similar:

Note: Past performance is not a reliable indicator of future results.

So does the daily graph:

Note: Past performance is not a reliable indicator of future results.

Full name for abbreviations used in previous text:

EMA 9: 9-day exponential moving average

Fibonacci 38.2: One of several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.

MA20: 20-day moving average

MA50: 50-day moving average

MACD: Moving average convergence divergence

Important notice

This information is neither an investment advice nor an investment or investment strategy recommendation, but advertisement. The complete information on the trading products (securities) mentioned herein, in particular the structure and risks associated with an investment, are described in the base prospectus, together with any supplements, as well as the final terms. The base prospectus and final terms constitute the solely binding sales documents for the securities and are available under the product links. It is recommended that potential investors read these documents before making any investment decision. The documents and the key information document are published on the website of the issuer, Vontobel Financial Products GmbH, Bockenheimer Landstrasse 24, 60323 Frankfurt am Main, Germany, on prospectus.vontobel.com and are available from the issuer free of charge. The approval of the prospectus should not be understood as an endorsement of the securities. The securities are products that are not simple and may be difficult to understand. This information includes or relates to figures of past performance. Past performance is not a reliable indicator of future performance.

22-09-2021 16:06:36

 

Skriv en kommentar

 

  

 

  

 

* Obligatoriske felter skal udfyldes