Tuesday, June 04, 2013

The Fears Of The End Of Quant Easing

Markets everywhere have been shaken over the last two weeks. First was the correction in the Japanese equity markets. It has lost substantial ground over just the last couple of weeks. Next came the Bernanke's testimony which led all to conclude that QE would be ending soon. 

If an article in Monday's Wall Street Journal is anything to go by, the U.S. Federal Reserve is getting ready to unwind its massive monetary stimulus program. So, is that prospect as alarming for financial markets as feared?

Fed officials have mapped out a strategy to wind down its $85 billion-a-month bond-buying program in careful steps, although the timing of when that will start is still being debated, noted Fed watcher Jon Hilsenrath wrote in the WSJ. 

Any unwinding of the Fed's quantitative easing (QE) program, which has fueled a rally in equity markets and other risk assets, is generally viewed as negative and any indication of this happening has been highly anticipated in the U.S. since late last week. 

"Having spent two New York sessions pricing in a sharp change in Fed stance, it is not obvious that the article was worth the wait," analysts at Westpac said in a note. "The timing of the unwinding of QE remains data-dependent, not a serious prospect until perhaps late U.S. summer at the earliest."


Analysts say that in essence, the Fed appears to be managing market expectations that its quantitative easing program will not last forever. The Fed has said that it would maintain its key interest rate between zero and 0.25 percent until the unemployment rate fell to 6.5 percent. It has also committed to monthly purchases of bonds until labor market conditions improve substantially. 

And it is the recent signs of improvement in the jobs market that has renewed talk about a possible end to the quantitative easing. The latest non-farm payrolls report showed the U.S. economy created 165,000 new jobs last month, much more than expected, helping push the unemployment rate down to 7.5 percent. Data last week meanwhile showed jobless claims at their lowest level in almost 5-1/2 years. 

It looks like the markets are just grabbing at excuses to do a bit of sell down after a spectacular run in most equity markets since the beginning of the years. The timing is still a bit uncertain, but seriously folks, the end game only looks to peter out by December this year. It is very good that markets are readying itself for the end of QE.

The Fed officials are not going to raise interest rates until unemployment comes down to 6.5 percent, and could only come earliest by 1st quarter of next year. What is likely to happen is when unemployment dips below 7%, we may see a scaling back from the $85 billion buyback figure to maybe halve that. 

The knee jerkers would be better off looking at the positives:
That [an easing of QE] would be good for U.S. stocks because it would mean the U.S. economy is doing a lot better.
- That at least markets are already trying to price in the end of QE, instead of a surprising one off massive sell down.

The last part is very important as we can easily reference to the 1994 massive sell down, just because Alan Greenspan never gave any indication as to the imminent rise of interest rates in the US. That experience probably forms the backdrop for Bernanke's communication strategy. He is managing expectations very well. By putting it out there with the 6.5% unemployment target, it allows all to see the looming horizon.


I still think halving the buyback when unemployment dips below 7% would be an excellent strategy to manage expectations further. Everyone knows QE cannot be there forever.

I like the equity markets now more than in the beginning of the year. Japan has corrected substantially even though Abenomics will still be in the works. This will drive Japan to retests its high this year soon enough. I believe the sell down was a good profit taking exercise and actually allowing a lot of stale bulls (i.e. those holding onto Japanese shares for over 20 years) to exit - all that will come back to the market place for sure.

The local Malaysian equity market has held up better than the rest, and confidence breeds confidence. Having said that, Malaysia is only up 4.6% so far this, thanks to the uncertainty over the elections period. Other Asian markets have risen a lot more, and hence had more room for downside: Indonesia 15.2%, the Philippines 16.4% and Thailand 10.6%.

7 comments:

bruno said...

I have to agree that the market is going higher,at least for the short term.That is the reason we squared off the remaining small short positions for 6 pts profit earlier.

Let us wait for the rally to come and see if the markets can make a higher high.If it is a lower high,watch out as the bears will be coming out of hibernation in herds of hundreds at a time.

Fung C.F. said...

QE is obviously inefficient in solving the unemployment problem. Companies' cash is at all time high but still unwilling to hire, technology has taken over in many aspects of business operations. To create jobs, construction sector needs a boost. (Am I actually saying the obvious? XD)

However, I agree too that the bull-run will continue. In fact, I think we have been paying too much unnecessary attention on QE. US economy is recovering and the rest is in auto-piloting mode now (albeit a very slow mode). Completing the QE is just a standard procedure of the recovery. The fear should not come from US anymore but somewhere else (I dunno, Eurozone or Japan or China or other emerging markets?)

p/s: your posting of babe pics is distracting as usual XD

bruno said...

Today,the fx markets went crazy,with the majors mostly down overnight made a reversal late morning.Couple hundred pips within an hour or so.And the greenback fell out of bed.

Finally the overcrowded trade of long dollar bulls were wiped out within a short period of hours.Our feel the pain stops were a couple hundreds pips away,as we are here to stay for the long haul.Expect a consolidation before the next wave up for the greenback.

bruno said...

The stock market is like a wild horse yet to be broken.Jumping up and down like a crazy mule in the paddock.This morning the dow was down 120 pts to be up 80 pts at close.

The saying markets up in the morning to end down in the evening,means smart money is selling.

The saying markets down in the morning to end up in the evening,means smart money is buying.

In other words the market is always right.Go gigure.

bruno said...

In the fx markets.Aussies reversal of 200 over pics yesterday was erased today.Now it is about 60 pics above today's lows.We have gone long the Aussie at 0.9480.

We took off 2/3's of our long Usd/Sf long positions for 100 pics loss.The charts do not look so good as yesterday's plummet has taken out the 100 & 200 days MA and trendline support.All the major supports gone in one hour.It has now gone over the broken trendline,and if it closes above the trendline we will take another shot at it sometime next week or so.

The stock market has gone crazy again.The dow is up almost 200 pts as of now.The smart money was on target again yesterday.

Have a nice weekend folks.

bruno said...

The markets are really going crazy.Bongkers should be the correct word to use.And we are not talking about the stock markets.The drama is in the fx markets.Traders big and small are getting their butts kick around like footballs.

On Thursday the Usd/Yen was down 300 pics only to retrace and closed down 200 pics.Early Friday in Asian trading the Usd/Yen was up 50 pics,only to drop like a rock to down 200 pics in European trading.Then slowly inching up,and shot up like a rocket after NFP was announced to be up almost 90 pics and 60 pics in the black at close.A whipsawing round trip of almost 600 pics.

The Aussie has had three huge reversals this past two weeks,only to give them all back,plus some.Thursday in early Asian trading the Aussie was down 100 pics only to reverse to be up 150 pics.Today it gave back all plus some 10 pics only to closed 70 pics above a new one year low.

This is what will happen in overcrowded markets.When Johnny come latelies are caught in the opposite directions they panicked in herd mentality styles.And all hell breaks loose.

It is just what will happen in the euphoria fill stock markets when the fat lady finally sings.It will make the mini flash crash look like child's play.

bruno said...

We have gone flat the Aussie for a 60 pics profit and have re-entered the long Usd/Sf trade at .9265,110 pics from where we last got off.Daily RSI is at around 35%,a very good re-entry price.