by Ivan Martchev

November 2, 2021

There is an FOMC press conference tomorrow, and it is widely perceived that Jerome Powell will reveal the details on the Fed’s upcoming taper, expanding on statements from the last FOMC press conference in September, when he indicated a rate of $15-20 billion per month in reduction of bond purchases.

The Fed is still the “central bank for the world,” since the U.S. dollar is the world’s reserve currency, so it needs to move more carefully, but other smaller developed world central banks are not so cautious. Last week, the Bank of Canada abruptly ended QE and signaled that it may hike rates as soon as April, as they realized the inflation picture may not be as transitory as previously telegraphed. The Canadian 10-year government bond has taken out the yield highs from March, when the 10-year U.S. Treasury hit 1.776%.

Also, the Reserve Bank of Australia abruptly ended yield curve control by letting key short-term rates move way past their targets, signaling that it is also moving up the timetable for monetary tightening.

It would appear that the central banking world has realized that inflation is not as transitory as they had hoped. Powell’s press conference should hold many details on the evolution of the Fed’s thinking on the inflation front, although he is in the unenviable position of having sold the “transitory” thesis hard to the investing world over the last six months, just in time for his potential renomination by President Joe Biden.

I am sure Powell wants another term, and I hope Biden does not cave into his progressive caucus to place somebody else at the Fed who is more willing to facilitate out of control government spending. The coordination between Powell’s Fed and the Treasury (now under former Fed Chair Janet Yellen) was necessary during the COVID crisis, but going forward shutdowns should only be used as a last resort.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In overnight trading at the start of last week, the 10-year Treasury was above 1.70% again, but as the week progressed, we saw a violent short squeeze in Treasury futures, driving yields down to 1.52%. While that may not seem like a big deal to retail investors, for a futures trader it is the equivalent of the S&P 500 moving 5% in three trading days. If the Fed is about to do what I think it will do, we will not take out 1.52% to the downside but make a run for 1.70% and higher after Wednesday’s press conference.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The huge divergence between junk bonds and the S&P 500 Index continues, as a total return chart of the SPDR Barclays High Yield ETF (JNK) looks rather weak, while the S&P is making fresh all-time highs. Those two can move in their own directions, but not for long. One of those two is wrong, as that long-standing correlation is unlikely to stop working. Daily closes below 108 on JNK would also indicate a completed head and shoulders top, which could imply that the October bottom for the S&P 500 is in play.

A Violent End to the Euro’s Dead-Cat Bounce

All the dead-cat-bouncing we had on the EURUSD exchange rate in October ended in one trading session on the last day October. Interest rate markets are moving fast, as higher FX volatility enters into the picture. I think the euro senses faster Fed tightening, particularly in light of the inflation numbers we saw last Friday, but we’ll know more on that front after Wednesday’s FOMC press conference.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The overall trend has been that the euro has weakened as the U.S. stock market has risen this year, but the day-to-day or even weekly swings (the zigs and zags on both the S&P 500 and the EURUSD exchange rate) typically move in the same direction, except for last Friday. If you look carefully at this chart, as the S&P 500 swings higher, the euro tends to strengthen and as the S&P swings lower, it tends to weaken.

The zigs (higher) in the euro are generally smaller than the zags (lower), as the euro has declined in 2021. On the other hand, the zigs in the S&P 500 are generally bigger than the zags as the S&P has rallied, but euro zigs have tended to coincide with S&P zigs, and euro zags have tended to coincide with S&P zags.

Did the violent move in the EURUSD exchange rate last Friday start another leg lower for the euro, and will that euro zag (down) correlate to an S&P zag? Wednesday’s Fed report may provoke the answers.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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