Metals Thoughts: Head Fake Edition
The Federal Reserve’s almost unanimous decision to leave Quantitative Easing purchases at $85B caught nearly all market participants off guard, regardless of asset class. Equities, commodities and treasuries all caught bids and triggered buy-stop orders in a very quick rally. Any shorts either covered immediately or got stopped out on the way higher as algo’s had a field day. The USD weakened against all major trade partners and most currencies traded at highs for 2013. All pretty much in a single afternoon trading session. And then it stopped. For metals, the lack of follow-on buying and the total disappearance of physical demand led to a choppy session Thursday and a 60%+ retracement of the gains on Friday. From Wednesday afternoon to Friday close, we traded 1300 to 1375 and then back to 1325. Tums sales were probably quite high in New York and London.
After the announcement, the general feeling in the markets was that the Fed had let an opportunity to withdraw the stimulus get away from them. As shown by the surprise rally, a moderate taper had been priced in and was considered by the majority to be a certainty, this trader among them. Why then, would the Fed postpone the pain for another day? The two major influences to me are 1) Market reaction leading up to the meeting being a bit stronger than desired and 2) Fear that the debt ceiling shenanigans will prove to be substantial headwinds. Of course there are a myriad of other factors (continued mediocre growth and non-existent inflation), but based on the last few days of media blitzkrieg, I believe the move in rates and lack of trust in our elected representatives to be the main motivators.
As we have discussed here (probably ad nauseum), fixed income securities of all kinds had been selling off in anticipation of SepTaper. We now know that the Fed did not appreciate that one bit. Higher mortgage rates had definitely hindered re-financings and was also beginning to slow the pace of new home sales and mortgage originations. I suppose if the Fed sees conforming 30 yr mortgage rates over 4.5% then something must be done! The Fed has since sent its members to the press en masse, and they are all repeating one chorus (except for Richard Fisher [swoon]): tapering will be data-dependent, not calendar driven. In a way this very much makes sense as there is nothing special about withdrawing stimulus in Sep over Dec or after 5 years instead of 5.1 (yes, it’s been 5 years), but hinting that the unemployment hurdle of 6.5% might not be low enough seems a bit ridiculous given that full employment carries a rate of about 95% in boom times. Perhaps easing will be Bernanke’s job and Yellen will end up having a hawkish legacy, despite her best efforts. I can just see her on the ropes yelling “Tag me in! Ben! Tag me in!”
Ray Dalio of Bridgewater How the Economic Machine Works (YouTube). I highly recommend this. Fantastic.
FT: I can haz no CapEx. This recovery is weak and profit, rather than investment driven. Hurray operating leverage.
Feet to the Flame: With vols running at or near their sustainable speed limit and Open Interest apparently determined to head lower, I think we might be in for a bit of consolidating cycle. Few traders seem excited to get long here. Is it really possible that markets will price in the taper regardless of what the Fed says? A break below 1300 could get very interesting as 1280 and 1200 were not that long ago. 1330 seems resistance. Debt ceiling shenanigans may provide some upside risk.
-- Bradley Yates, Senior Trader, Elemetal Capital
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