• Comments for February 1, 2018

    I am a little bit at a loss for the Fed to have unanimously decided not to raise rates, but to caution over growing inflationary pressures.

    What is this all about? Is it a way to try not to start a market crisis at a time of shift of Fed chair? Is it a way to try not to add fuel to the burning fire of higher interest rates?

    So now, markets expectations for higher rates in 2018 are even higher than what they were two days ago. Hence, this no-rate-hike decision should push rates higher since expectation is higher. This should also help the US$ gain ground against other currencies. At least, this is what the EV patterns show.







    We can see below that dividends linked sectors attracted money both before and after the Fed's decision.





    VNQ however still displays a negative EV pattern though.



    We can see below that the 10Y attracted money just at the Fed's decision, but then the move was discounted down - expectation for future hikes is what matters to present investors.



    Below is a Figure that I posted earlier: the Currency/Rates differentials compared to the US$/Euro. We can see that the two figures have moved in close correlation for the past years, except for the past 2 Months. Why is this? Also, should we not expect the correlation to reassert itself over time? If yes, will the US$ bounce back up or will US rates fall back down?

    Those who have a clear view of this situation will be able to correctly position themselves for the rest of 2018. Since US rates are expected to move higher still, then I conclude that the US$ will bounce back up.

    Regarding the cause for the reversal in the correlation, the only thing that has changed in the past two months is the QE unwind. This move is responsible for keeping US rates high, rotating money into equities (from fixed income assets.) Now that we can add the official Fed fear about inflationary pressures, I do not see how rates can come back down. Hence, we should expect some more rotation into equities but also a stronger US$.

    So why is the US$ not catching a bid here is out of my understanding. Is China still doing some rebalancing out of US assets and the US$?



    For now, we can see that the small caps continue to underperform. Another sign that investors expect higher rates.



    Yesterday, the great majority of the trade ideas issued a buy alert. This simply indicates that the whole market dipped and then bounced back up. This move is independent of individual stocks.



    On a side story, FB published earnings yesterday, which were rather good, but the caution about user base spooked investors in after-hour trading.



    Conclusions:

    Now this is the most difficult section: what to do?
    For now, I would NOT buy gold/gold miners or commodities/energy that are priced in US$, because the US$ is technically going higher.
    I would not buy defensive stocks either, because rates are still going higher.

    The only attractive assets are large caps equities, but have they pulled back enough to warrant some buying here?