Markets saw a much-anticipated bullish move yesterday as technical indicators of all kinds signaled an oversold market that begged for a catalyst. The catalyst came with a vengeance: the BOE reversed course and bought an unlimited number of long-term bonds (gilts), to stabilize their currency and financial markets. Although you hear pundits in the media bashing the BOE, try to draw comparisons with other central banks. This decision was the best one to make when a rapidly changing fiscal policy is doomed, no matter which side of the island you are on.
The UK recently implemented fiscal policy focused on deep tax cuts and the expansion of other business benefits to grow their economy – the kind of expansion that leads to higher wages, higher energy demands and a lower tax base, which does not address any of the problems they currently face. In fact, every trader, investor and institution saw the flaws in this fiscal strategy and immediately sold positions, causing the pound to fall sharply and rapid increases in fixed income yield to the point where their own pension were in margin calls. . Talk about a disaster.
The US market is not the same as the EU, UK or any other major country. Policy will not change unless a catastrophic credit crunch appears nationally, which would be the “Black Swan” event. Financial institutions shielded themselves from the catastrophic shortcomings of the 2008 financial crisis. That’s not to say a credit crunch is impossible: the iShares Investment Grade Corporate Bond (LQD) ETF is at pre-financial crisis levels, a topic that has taken the streets by storm. But it’s not a great measure of liquidity, just a measure of corporate bond yields relative to Treasuries. Both are seeing levels we haven’t seen in over 20 years. The CDS (Credit Default Swap) market is seeing widening spreads, hinting at some financial “stress,” but even then exposure may be limited to over-leveraged investment banks and risky international real estate markets.
The focus should always be on national fundamentals. The Personal Consumer Expenditure (PCE) index is released this Friday, a key measure for the Fed. The ISM Manufacturing PMI, another key barometer on the state of the economy, will be released next week along with the JOLT (Job Opening and Labor Turnover Survey). These indicators should reflect a slowing economy. This will be the catalyst. Everything else is just noise at this point. So, “Don’t go chasing after waterfalls” because convincing yourself to believe in a story that isn’t 100% cooked usually results in losses.
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