It has been a while since I wrote something on this blog. I have actually been extremely busy and did not daytrade whatsoever. Since the nature of this blog is to serve as daily journal for my trades, I had nothing to write about. In addition to that, last week economic data was fairly tame and there is no major moves in the market. I somewhat expected this, as we had a major market move two weeks ago.
Fortunately, the wait is now over! This week, we will see some major economic data & statements come out which should move the market again.
- FOMC Rate Decision/Statement
- RBNZ Rate Decision/Statement
- BOJ Rate Decision/Statement
- US & Canada Preliminary GDP
- Euro & German CPI
That’s three (3) central bank rate decisions, two (2) GDP results, and crucial CPI data coming out this week. Brace yourself it’ll be a doozy.
Potential Pump & Dump?
As of Tuesday, October 28th when this article was written, there were 8 up days out of 9 trading days since October 15th when market seemed to “bottom out”. Is this a dead cat bounce or a real rally? The answer is I don’t know. As I mentioned in this previous article, anyone who said they know something is either spewing out bullshit or they have that $9.99/mo central bank newsletter. Having said that, I believe this is just a dead cat bounce. There are a few reasons why I think this is the case.
Punchbowl No Longer
FOMC Balance Sheet (Source: FRED)
The Fed balance sheet has grown significantly since the start of recession in 2008. They have now accumulating over $4 trillion in assets which is over 20% of US GDP. The question here are twofold, can the Fed stop growing their assets? and how will the credit and equity market react when they are start letting these papers mature or even winding down the position?
The first question seems easy to answer, it looks like they will finally stop expanding in October 2014. This FOMC meeting should end the bond buying program as scheduled. I am not expecting any surprises here.
However, the end of bond buying program this month will bring the second question into the headline. How will the market react when the punchbowl is taken away from the system? It was borderline comical seeing the market’s kneejerk reaction when Jim Bullard of St. Louis Fed said “Fed should consider delay in ending QE”. Market soared since that statement for the entire week. Is this really the mark of a healthy market? Think about it, a five (5) days plunge in the market can only be stopped by a Fed governor basically spoke to extend the punchbowl before market will rally again. I’m not one for crazy theory but it sure seems the market participants are addicted to this QE program and will do anything to keep the drugs running.
Mind you, stopping the QE is just the first step in going back to normal Fed operations. They still need to raise interest rate and unwind their position. God knows what will happen to the bond yield when everyone is rushing out the door at the whiff of Fed’s unwinding its holdings.
Global Picture is (still) Ugly
Global Unemployment Rate (Source: Eurostat)
Eurozone has been plagued by malaise for years now. Even when US Economy improved after recession, Eurozone countries were mired in their sovereign debt crisis which further deteriorate their already weak demand. As I mentioned previously, they are set to enter a triple dip recession in Europe this quarter. European confidence index slipped to its lowest figure in a year and their unemployment rate is still extremely elevated at over 11%. Without confidence and jobs, demand is weak which in turn drives inflation in Eurozone to be (way) below ECB 2% target.
Germany, the driver of Eurozone, is looking weak, in addition to the decline in export data from several weeks ago (which will drag them into recession in Q3), their IFO Business Confidence index is at its lowest point since 2012 as well.
Japan is another basket case (and has been for decades now). The issue is exarcebated in Japan as their working age population is now declining as they get older. They need to quickly find the magic to spur export as well as domestic consumption. Abenomics is not working and the VAT increase has only dragged the aggregate demand even lower. Bank of Japan is expected to announce an extension to Quantitative and Qualitative Easing (QQE) scheme in December meeting. This QQE extension should theoretically should spur Nikkei upwards but I remain cautious on this as this is a massive undertakings, even surpassing the effort from FOMC during The Great Recession.
How to trade this?
I have been building a “long JPY’ position across the board the past week. These positions are extremely small and they are basically shorting EUR, CHF, and GBP against JPY. Reason being is that I am skeptical about how the extension of QQE scheme will work in Japan and weakness in Nikkei will translate into a strong Yen.
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