S&P 500 Near All-time High, But Appears To Be Nearing Peak (China? Fed Bubble Team? Hindenburg Omen? Bollinger Bands?)

The S&P 500 Index’s second fresh high this week saw the equity benchmark close just shy of 3,047 on Wednesday and continue its upward trajectory toward an overbought level.

Its GTI Global Strength Indicator — a smoothing oscillator showing the strength of a price — reached 66.5 intraday, the highest since mid-July. Earnings and Friday’s U.S. payrolls report may help to determine whether the technical gauge triggers its first sell signal since that month or remains in a neutral zone between 30 and 70.

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Technical indicators are adored by many (just not academics). BUT if you believe in Bollinger Bands … the S&P 500 index (white line) is near the upper limit of its upper band (pink).

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Do you believe in the Ichimoki Cloud? Currently, the NYA (New York Stock Exchange) is trading ABOVE the cloud.

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How about the Hindenburg Omen? It was correct in signaling a market downturn way back in 2007, but has not really been a good forecast of market corrections since 2007.

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Elliott Wave? The NYA seems to be at the top of wave.

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Of course, The Federal Reserve impacts markets. As of today, the Fed Funds Futures market is predicting no rate cuts at the December FOMC meeting and no rate cut until the March 2020 meeting.

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The then there is the China trade deal where China is indicating “no deal” unless the US rolls back more tariffs on Chinese imports.

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Do we settle for Pabst Blue Ribbon in the China trade talks or go for Heineken?

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In bubbles, I dream.

 

Fed Will Purchase $4.65 Billion 3-7 Year Treasury Coupons Next Week (These Rates Were Made For Dropping)

These rates were made for dropping.

(Bloomberg Intelligence) — The New York Federal Reserve will purchase T-bills twice next week. Besides bills, it will buy the 3-4.5 year and 4.5-7 year coupons using MBS runoff proceeds. In this note, we look at the bonds the Fed is unlikely to purchase, given its self-imposed buying criteria; for T-bills, the Fed avoids those with four weeks or less to maturity. 

The Fed has several criteria for adding bonds to its portfolio. The trading desk will limit System Open Market Account (SOMA) holdings to a maximum of 70% of the total outstanding amount of any security. It also won’t purchase securities trading special in the repo market for specific collateral, newly issued nominal-coupon securities and those that are cheapest to deliver into an active Treasury futures contract. Exclusions also include securities that mature in four weeks or less.

The exhibit shows bonds the Fed likely won’t purchase, based on these conditions.

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Here is a snapshot of the 3-7-year sector of Treasury coupons outstanding and their spread relative to a theoretical relative-value spline curve. The Fed will look to purchase securities that are cheap to its own relative-value model.

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The US Treasury curve slope (10Y-3M) has creeped into positive territory.

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And mortgage rates continue to rise again.

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Yes, these rates were made for droppin’. And that’s just what they’ll do.

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Natural Born (Volatility) Killers! ECB’s Draghi’s Low Volatility Legacy (Fed Also Kills Bond Volatility AND Term Premium)

The ECB under Draghi has been effective a depressing bond volatility and yields as he passes the torch to Christine Lagarde.

(Bloomberg) — Looking through the lens of rates market volatility, Mario Draghi has performed a masterclass in the art of keeping it very low. Incoming European Central Bank President Christine Lagarde will have a challenge to achieve the same effect as monetary policy nears its limits.

A successful central bank will aim to keep market volatility controlled by the predictability of its policy. Draghi has been in the business of keeping euro rates volatility suppressed, by communicating policy shifts effectively and deploying large-scale monetary easing.

Lagarde may find it harder to achieve a consensus on easing, inheriting a divided Governing Council. Policy makers disagree on whether more monetary stimulus is needed, and have voiced louder calls for fiscal policy to do more.

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Of course, The Federal Reserve is not too shabby about killing bond volatility.

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Treasury note term premium (the amount by which the yield-to-maturity of a long-term bond exceeds that of a short-term bond) has been reduced to negative territory.

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Yes, the ECB and Fed are natural born volatility killers.

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A Horse Is A Horse … Fed Chair Powell Announces New QE … That Is Not QE?

A horse is a horse, of course, of course, but no one can talk to a horse, of course. Unless, of course, that certain horse is … Jerome Powell!

(Bloomberg) Federal Reserve Chairman Jerome Powell said the central bank will resume purchases of Treasury securities in an effort to avoid a repeat of recent turmoil in money markets, while hinting at the possibility of another interest rate cut.

“My colleagues and I will soon announce measures to add to the supply of reserves over time,” he told a National Association for Business Economics conference in Denver on Tuesday.

The Fed chief suggested that the purchases would be made up of Treasury bills and stressed the buying should not be seen as a return of the crisis-era quantitative easing programs that the Fed engaged in a decade ago to boost the economy. Three-month bill yields fell on the comments.

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“I want to emphasize that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis,” he said. “Neither the recent technical issues nor the purchases of Treasury bills we are contemplating to resolve them should materially affect the stance of monetary policy.”

“In no sense, is this QE,” Powell said in a moderated discussion after delivering his speech.

The Fed has cut interest rates twice this year to shelter the U.S. economy from weak global growth and trade-policy uncertainty. Traders in federal funds futures are betting that the Federal Open Market Committee will reduce rates again at its Oct. 29-30 meeting from the current target range of 1.75% to 2%.

Another Cut
In the question and answer period after his speech, Powell compared the current period to two instances in the 1990’s when the Fed cut rates three times in a successful effort to keep an economic expansion on track.

Powell’s comments suggest the Fed is inching closer to reducing rates at the upcoming meeting “but it’s not a done deal,” said Michael Gapen, chief U.S. economist at Barclays Plc.

“Another rate cut as early as this month remains a real possibility,’’ agreed Sarah House, senior economist, Wells Fargo & Co., who attended the Denver conference.

Powell told the gathering that the actions the Fed has already taken “are providing support for the outlook,” which remains favorable but faces risks, principally from global developments such as trade and Brexit.

“The broader geopolitical risks are important right now,’’ Powell said. “You have to be watching those carefully and assess the implications.”

Slowing Economy
The economy has recently shown signs of slowing as weakness overseas has spread to the U.S. and moved from domestic manufacturing industries to services.

The job market has also downshifted, even as unemployment has fallen to a half-century low of 3.5%. Nonfarm payrolls grew by an average of 157,000 per month in the third quarter, compared with gains above 200,000 earlier in the expansion.

Powell said that work done by the Fed mining private-sector data suggested the most recent job gains may ultimately be revised lower, but that the pace would still be above the level needed to hold unemployment steady.

He voiced confidence though that the economic expansion would remain on track. “This feels very sustainable,’’ [That’s what she said!]

Repo Market
Money markets were roiled last month as a combination of corporate tax payments and the settlement of Treasury debt purchases temporarily sent short-term interest rates skyrocketing.

The Fed announced last week that it will extend through October the ad hoc liquidity lifeline that it’s been offering to U.S. funding markets since then.

“We will not hesitate to conduct temporary operations if needed to foster trading in the federal funds market at rates within the target range,” Powell said.

“As we indicated in our March statement on balance sheet normalization, at some point, we will begin increasing our securities holdings to maintain an appropriate level of reserves,” he added. “That time is now upon us.”

Well, maybe not right now.

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The NEW logo for The Federal Reserve.

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Alarm! VIX Futures Curve Inverts As Dow Drops >500 Points (Tech Stocks Hammered)

It’s NOT always sunny in financial markets.

Today, the Dow dropped >500 points (2%) as of 12:2pm EST. Europe is even worse with the FTSE 100 down 3.23%.

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Meanwhile, the VIX futures curve has inverted!

(Bloomberg) — The front of the VIX futures curve has inverted, pointing to acute concern about the near-term outlook for a stock market that’s come under considerable pressure the last two days.

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Some traders use a VIX curve inversion as a “take cover” signal, noting that would have helped avoid much of the damage associated with risk routs in Q4 2018, during the February 2018 Volmageddon, and amid the August 2015 devaluation of the yuan. On the other hand, it’s also produced numerous false positives. For instance, the Aug. 5 inversion on a closing basis also marked an intermediate bottom for the S&P 500.

For investors in long/short volatility exchange-traded products, this is when the term structure starts to act as a headwind or tailwind for performance.

Tech stocks are getting blasted (Microsoft, Apple, Cisco, Intel).

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Green man strikes again!

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Come Dancing? US Treasury Considering Issuing 50- or 100-year Bonds As 30-Year Treasury Bond Yield Hits All-time Low (Negative Yielding Debt Growth Sends Gold Skyrocketing – 14 European Countries Have Negative 10-year Yields)

As the US House of Representatives (that controls the purse strings of the Federal government) escalates spending, the US Treasury has to issue more debt. In fact, the US has now exceeded the 100% debt to GDP that was first exceeded back in 2012 in the wake of the financial crisis.

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And with the US Treasury 30-year yield hitting all-time lows,

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Treasury is exploring longer-term maturities to refinance its debt and issue additional debt to cover the Federal budget deficit.

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(Bloomberg) — With interest rates on 30-year U.S. debt hitting all-time lows this week, the US government is once again considering whether to start borrowing for even longer.

The U.S. Treasury Department said Friday that it wants to know what investors think about the government potentially issuing 50-year or 100-year bonds, going way beyond the current three-decade maximum.

Well, US dollar swaps go out to 50 years, so 50-year Treasuries are not that much of a leap.  But can we try 40 years first??

But given the unusual shape of the Treasury and Swap curves (both inverted in the short-term), is this Fed-caused disturbance in the yield curve or a signal of recession in the coming 5 years.

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And as global negative yielding debt explodes, so does gold prices.

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Its the same all over the world in terms of negative yields.

In fact, 14 European nations have negative 10-year yields.

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