Tag Archives: Federal Reserve

The other day figures were released showing ownership and net purchases of US Treasury debt in 2013. There’s a good set of graphs over at The Big Picture. The big headline in all this is that the Fed was far and away the largest net buyer, having account for over 70% of all issuance last year. Of course this is a function of the central bank’s ongoing quantitative easing program.

We should not be surprised by such big figures, and probably should look to see more of the same moving forward. Why? A couple reasons.

First, even though the Fed has begun tapering it is still replacing maturing Treasury securities in its portfolio. That means even if the Fed balance sheet is not expanding as rapidly as before, it is still a big player in the market just because of portfolio turnover.

Second, as the US federal deficit shrinks so too does the amount of Treasury issuance. That means the denominator in the Fed’s fraction of net Treasury purchase will be lower, helping to keep that percentage somewhat inflated. In other words, this is a case where it’s probably not a great idea to be too caught up in these ratios and percentages.

Another interesting element of the report is the ownership data. It shows that even though the Fed owns a whole lot of Treasury debt, it is still only the 3rd largest representative group. The U.S. public owns nearly twice as much, and foreign governments and central banks aren’t very far behind. Combined they account for nearly 70% of outstanding Treasury paper. For the reasons noted above regarding portfolio turnover, the Fed will continue to own a meaningful fraction of the US national debt, and the fraction could even rise a bit.

This supports something I talked about back in August when I described the Fed as basically being a big portfolio manager in the debt market.

Last week the Federal Reserve announced a further $10bln “taper” in its monthly Treasury purchase program, continuing the process of reducing the amount of quantitative easing the central bank is doing. This is something largely expected by the markets, thanks to the commentary they’ve been getting from the likes of Ben Bernanke. The Fed has been signalling that it intends to gradually reduce the size of the QE injections, probably ending them all together at some point this year. There’s a chance we see some change in tone now that the traditionally dovish Janet Yellin is leading the Fed, but most likely it will be the economy and employment that dictate the path forward.

The markets were a bit ho-hum about the taper this time around. There were a few initial reactions, which we so often see these days, but for the most part established patterns are in place and weren’t meaningfully influenced. The taper was anticipated and market participants are on to looking at other things like the economy.

As to the economy, it has to be said the markets aren’t speaking too positively about it. As the chart of 10-year Treasury yields below shows, rates have been working lower since the first Fed taper in December.

10 year bond yields

A drop of about 40 basis points in yields is not something one looks upon as indicative of a market looking for robust economic growth moving forward. Even more so with rates currently still at historically low levels.

We see further reason for concern when looking at the S&P 500 chart.

S&P 500

The fact that we have something of a double-top type of pattern from the December/January peaks is a concern in and of itself. This becomes even more worrisome when we consider how rapidly the market move down to test the December lows. Yes, it has thus far found support there. A strong market, however, would not have fallen that far. My concern is that while we may see some kind of rally develop in the near future, that might just be the precursor to a break below 1770 on the index as a legitimate downtrend develops in the next few weeks.

Interestingly, this is supportive of some of the commentary out of the Fed last week. The move to taper was not indicated as particularly reflective of the idea that the US economy is growing rapidly or that employment is falling precipitously. Neither of those things is happening. And of course there is going to be a group of traders and investors feeling like reduced Q.E. means less support for the economy and thereby weaker prospects moving forward.

Of course the USD likes that less money is being pumped into the system. As I’ve written in recent weeks here and here, the greenback is actually in a good position to benefit from the tapering.

In the United States this week, we were twisting and shouting like a 1960s disco track, while Italy wasn’t feeling the amore from financial officials and Greece wasn’t succeeding in its Olympic financial fiasco. Here are the top posts from last week:

The markets were expecting the Federal Reserve to announce Operation Twist, in which the Fed would sell short-dated Treasury debt and use the proceeds to buy long bonds. The Fed initiated a similar act in the 1960s, but with today’s numerous economic uncertainties – high unemployment rates and consumer debt – this small step is unlikely to create much spending. While America grappled with its monetary quandaries, Europe tried sorting its financial flounders. Standard & Poor downgraded Italy’s credit rating, saying arrivederci to the country’s A+ grade and ciao to its A mark with a negative outlook. Across the Adriatic Sea, Greece was also continuing to experience its continued economic pounding as it straddled the brink of default. The European Union

commissioner has said “the EU will not abandon Greece or let it default uncontrollably.” France is planning a 10 to 15 billion euro recapitalization plan for five top banks combating the debt crisis, causing a formal denial from financial ministries. The ministries said the government held discussions with leading banks about their state of heath, but denied bailout offers. One top financial executive said “French banks have a sufficient capital base compared to other European banks and they are making profits.” Also in Europe, the Swiss bank UBS’s chief executive resigned Sept. 24 after a $2.3 billion rogue trading loss. Oswald Greubel’s resignation ends days of speculation about whether or not he would retain his top post among one of the biggest scandals to hit the Swiss bank.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

After another week of big news in the world currency markets, check out the top stories that caught our attention:

This week, much of the news in the foreign exchange world focused on a continuously troubled Greek economy. As European stocks have fallen and the euro faces pressure, Greece plans to sell off billions of dollars in state assets to raise funds in order to meet the demands of international lenders. Also, as gold pricing recently reached record highs, many Greek citizens have used their savings to buy gold in preparation for a possible sovereign default. In other news, Federal Reserve Board Chairman Ben Bernanke has downplayed the chances of QE3, citing improvements in the U.S. economy from the same period last year. Meanwhile, the latest annual World Wealth Report shows that there are now more rich people in the world than ever before, as the number of people with more than $1 million of investable assets has jumped 8.3% in the past year. And Bitcoin, the virtual currency, still has the Forex world buzzing. A major Bitcoin was hacked, causing its value to significantly decrease and leading many to wonder whether this controversial currency will last.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

With the end of this month will come the end of the Federal Reserve's second quantitative easing program, known as QE2. On Thursday Currensee will be hosting a panel discussion where the implications of the ending of QE2 will be addressed. You can learn more at http://www.currensee.com/endofqe2

In case you don't really know what QE2 is all about, let me give you the skinny.

Quantitative easing is basically the central bank (Fed, ECB, Bank of Japan, etc.) purchasing securities from the market. This is intended to accomplish a couple of things. One is to stabilize, if not increase, the price of the securities being bought. During QE2 that's been US Treasury bonds and notes. Because bond prices and yields move in opposite directions, rising Treasury security prices means lower interest rates. This isn't as neat and clean as when the Fed changes the Federal Funds Rate or the Discount Rate, but at least it could be said that rates would probably be higher without the Fed buying Treasuries simply because of the demand the central bank represents.

The other thing QE does is inject money into the economy. When the Fed buys Treasury securities it "prints" money to do so. That expands money supply, at least on the base level. That's more money that can be used by the banking system (since just about all money ends up there in one way or another) to create new loans. Of course, in an economy like the one we're in now where banks have tightened standards and borrowers are not as interested in taking out loans, the impact of QE on loan growth isn't much.

Where QE is seen as having a secondary impact, however, is on asset markets. The perception of many in the markets is that the increased amount of money in the system has been responsible for the big gains we've seen in commodity prices. Since the Fed decided to do QE2 because of the risk of deflation (the opposite of inflation), these rising prices (including those in stocks) are perceived by the market to have been the Fed's intention. No doubt this subject will come up during the panel.

The Fed has indicated that it will conclude its $600bln of QE2 Treasury purchases this month. That isn't to say, however, the Fed will be out of the market starting on July 1st. Quite the contrary. The Fed has indicated that it plans to continue reinvesting the principal repayments it receives (both from maturing Treasury securities, and from pre-payment and maturity inflows from all the mortgage-backed securities it bought during QE1). The plan is to keep the Fed's balance sheet (total security holdings) at a steady level, so we will continue to see the Fed buying periodically, just not in the same volume. To that end, it could be suggested that QE2 won't actually be over. I'll leave the semantic decision about that to you.

What we will look to address in the panel is the implication moving forward of the end of QE2 as it relates to the global markets. Hopefully you can join us. http://www.currensee.com/endofqe2

 

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As mentioned in my last post, it can be very problematic dealing with the increasing plethora of statistics that bombard you through the trading day. We touched on structure around news events and statistics, and now we look at what this all means in the current economic and therefore trading environment.

Unfortunately the current climate is not easy to decipher as the influence of the American stock market continues to dominate nearly all asset classes. There remain two major counter forces. The first is the perception that major company profits announced this week have been beyond analyst’s estimates. I think it’s worth pointing out that it is in the market participants’ interest to underestimate in order to provide a positive spin. The results season is nearly always positive in the short term, but until the market has received all the information, it can rarely trend. It is also important to remember that banks generally make profits at the expense of everyone else, and moving forward, the new finance bill will erode their ability to generate derivative trading profits to the same degree.

Adding to the inability to find direction is the string of economic statistics that show the U.S. slowing down quickly, whilst Germany in particular garners some benefit of the weakened Euro via an increase in manufacturing. Finally, we had Mr. Bernanke’s biannual testimony, in which I felt he was extremely downbeat on his assessment looking ahead, and most worryingly, gave no specifics about how they would tackle problems if they occurred in the future.

The reality is that the Fed is largely boxed into a corner as rates at the short end and for providing liquidity to banks are already at rock bottom. However for corporates and individuals in the mortgage market, rates remain stubbornly high and the evidence that the recent slide in yields has had no impact on mortgage applications suggests that borrowing costs are still too high. When rates are perceived to be at rock bottom, it appears that all the risk is to the upside, which stifles commitment, entrepreneurial spirit and therefore growth.

The solution is relatively simple, but he shows no signs of considering it. The Fed needs to cap long term rates at a much lower yield than what they are now. A ceiling of 1.5% on 30 year money would in all probability lead to rate moving even lower as demand for any yield would still exist. If businesses and individuals know there is a ceiling it removes the fear, and allows for stabilization in asset prices and an environment for growth. The more proactive this is, instead of waiting for a fresh crisis to develop, the more positive the impact. Unfortunately from Mr. Bernanke’s comments this week, it appears a crisis will have to occur before this policy could even be contemplated. In a jobless recovery, stagnant wage growth and falling asset prices, the risks to that happening are increasing.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

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In a world where the continuous stream of economic and fundamental statistics swamps even the most hardened trader, it’s important to maintain some sort of structure around how you can manage your positions through these numbers and not be caught out by short term spikes of volatility. It also allows you to have a game plan about how you can position yourself so that you’re not paralyzed into inactivity.

Thursday was a classic example of this and created trends that were reversed or continued as each statistic hit. The only real constant was foreign exchange where the dollar weakened or held station as each new story broke. This lack of volatility in relationship to bonds and equities was a good indication of the dollar’s continued inherent weakness that I have touched on in last week's post as well as the post the week prior.

The day started at 3am with the Chinese economic numbers, which caused a spike in the E-mini and a fall in the dollar. The numbers were not as bad as feared. By the morning all eyes were on the Spanish bond auction, which was well received. Stocks rallied, bonds fell slightly, and the dollar had already weakened further before the number.

Next were JP Morgan’s results, which at first glance were startling good. However, a look below the surface saw that some 36 cents of gain was due to lowering their reserves against bad debts. I perceived this to be a somewhat dubious one-off adjustment that, if I’m right on housing as I have been, could well be reversed in the quarters ahead. stocks spiked again, but reality on the JP Morgan stats caused a drift back, and bonds collapsed far more than had been there reaction to Spain. A second bond negative story was what got the trend moving.

However, by 1.30 there was claims data and the NY Fed and PPI. The market focused on the most up-to-date figure on the Fed as equities went lower and the dollar fell again. The bond bounce was muted.  Industrial production for June was slightly better and caused a brief equity rally. The importance of analyzing and understanding stats was significant in the same way for JP Morgan, in that the rise was due to utilities increasing, which was due to the heat wave. That is an artificial expansion.

Finally, the Philly Fed arrived, which was weak as well, and now equities could slide aggressively until (in classic technical fashion) they filled the gap from Monday. This caused the bond market to erase all its losses and the U.S. bond market to rally to new highs. The dollar had already exhausted its ability to trend having been under pressure all day. Also, rumors of the Goldman’s settlement saw all the equity losses erased, but it was too late in the day to influence currencies or bonds in any meaningful fashion. In fact bonds just held there station.

So how do you ride the waves of stories? This depends on what time zone you are trading in. European traders are at an advantage because they have the benefit of riding through all the major statistics, which allows for two major trends per day. American FX traders normally just have one, but equity traders can still get two (as occurred on Thursday). They could end up being all one big trend or a major reversal of the morning move.

Obviously the first thing is to have a firm grip on all the likely market moving events. In order to prevent paralysis, signals must be taken as normal and stops entered. If the statistic moves your way trailing stops can then be applied and the time frame this is applied to is critical. My statistical analysis shows that trends typically last between 15 to 20 bars before some sort of corrective phase. This means that if you want to ride the morning and afternoon trends, a 15 minute chart is the correct one. If there is (as on Thursday) a sequence of tighter times between statistics, this must lower down to 5 minutes.

There are two basic ways to ride the trend (But first, just to use a simple 3 period moving average moved one bar forward so its value is fixed on the current bar. When it changes direction or price closes back in the opposite direction of the average you exit. This is the tightest form of trail you can use.):

  1. For those who wish to track price action, the use of simple fractals or swing points can be used. In a downtrend as soon a price closes above a bar that was the highest point as the middle bar within a 5 bar patterns, you exit.
  2. For those that are the most risk averse, you can use a 3 bar pattern, but this method is unlikely to ride the entire trend. In an uptrend it is simply the opposite, so you monitor the lowest middle bar within a five bar pattern. With this method, when a market such as the dollar simply trends throughout day this will normally capture the entire move.

Finally, remember that when a trend day occurs the most common occurrence is that the close will be very near to the absolute high or low of the day.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Monday is an official holiday across many of the European countries. Just in time right? Next Monday is a holiday in the US as those of us in the Northern Hemisphere get geared up for the summer time season. It’ll probably be a much needed break for all involved in the markets as the current on-goings have been breathtaking.

As the calendar moves toward the summer time season traders are asking if there will be a break in risk aversion. After all stocks rallied last Friday from negative territory to the highs of the session in the last 30 minutes of trade as traders took profits on their short positions. Currensee shows that traders are Long EURUSD (based on volume) but still Short USDJPY as we enter the new week of trade. This is an indication that currency traders are not universally set to place risk back on despite the holidays.

Those that may not be celebrating a holiday break on either day may be central bankers from both sides of the Atlantic. The ECB has begrudgingly started to become more accommodative as the turbulence in the markets has increased and it’s unlikely they will be stepping away from their offices for long. The Federal Reserve on the other hand has its own issues. Last Thursday the Federal Reserve released the Money Supply figures for the US. These are no longer a top focus point for the markets but economists still watch them for clues. The latest report showed that M1 and M2 have both declined with M2 hitting its lowest level since last September. M2 is essentially cash in circulation and money in short-term deposits that is readily available.

Why is this concern? Basically for the same reason that US jobless claims jumped unexpectedly higher on the same day. They were far above expectations at 471k while continuing claims rose as well. Just when we thought the economy was improving we find that fewer people may be landing jobs and less money is circulating through the economy. To paraphrase economists this is a concern on the direction of inflation. Inflation is a cause of excess consumer demand and if there is less demand at already low levels of inflation then it may be time to start discussing the threat of disinflation. Not exactly what the Federal Reserve wants to do as they were hoping to start unwinding their extraordinary monetary policy.

Traders are asking if risk aversion is going to take a summer holiday. It may be time to start placing great emphasis on economic events again to see just how strong the US economy is. A sudden change in direction in the economy would not be a welcome sign for an already nervous market.

This report is for your information only and does not constitute investment or business advice or an offer to buy or sell securities.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.