Home > Uncategorized > 2012/05/17: Fed more likely to step in. Does it matter?

2012/05/17: Fed more likely to step in. Does it matter?

© 2012 ROHR International, Inc. All International rights reserved.

It is one of those canards in the current equities market (and to a lesser degree economic) psychology that there is no more extensive QE (quantitative easing) at present by central banks outside of Japan. Nor is there any explicitly planned. Yet there could easily be more if conditions warranted.

This is a form of the central banks’ desire to both have their cake and eat it. Whatever one might call it (‘Bernanke Put’, etc.), the central banks have indicated that they are indeed ready to provide more liquidity if necessary due to deteriorating economic conditions or disorderly market activity.

Seems like a good way to underpin market psychology. Yet, will it really help all that much if the crunch returns? Frankly we’re skeptical. And the context of the FOMC minutes key passage yesterday highlights how the promise of easing or liquidity infusions in a crunch will not likely actually do much overall for the economy.

Page 9 of the April FOMC meeting minutes released yesterday includes the indication, “Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough.” And that was an increase since the last meeting in the number of those friendly to the idea. So it might be assumed by some that the Fed is going to ride to the rescue if the US economy and equities falter at all.

However, the equities bulls have failed to process that the Fed is not interested in further encouragement for an extension of the already significant rally the equities have experienced since early 2009 (when the Fed was specifically committed to improving asset values.) After recovery from the sharp selloff last year, the major market indices either recently neared or modestly exceeded previous all-time highs.

Hardly a case for further stimulation at this time. And yet, given the lags in the impact of central bank actions, if the Fed (and other recently less accommodative central banks) should move in the case of a market crisis, would it really have that much of an impact? Given we have already seen multiple rounds of such activity that have not necessarily helped overall economic conditions, it is possible the public and financial community might not take it as a reason for renewed optimism.

Are Things Really Weakening?

That’s a good question. And the global economy is so intertwined that it is actually fairly tough these days to assess the myriad cross currents in a way that produces a clear fundamental view. Within a broad ‘macro-technical’ analysis it is always necessary to make certain assumptions about the underlying fundamental (i.e. macro) trends. And as we have noted of late, things appear to be weakening below the surface in a way that is not necessarily easy to discern from the headlines.

That much was explored at some length in last Friday’s Better headline global economic data could be highly ‘specious’ post. It is worth a read for the specific headline indications that have masked obvious underlying weakness on factors from Australian Employment to Chinese Trade figures. Speaking of the latter, last Friday’s post also has a link back to an April post on the possible Chinese culture shift.  It may be a factor in the ‘received wisdom’ that China easing bank reserve requirements will lead to immediate robust reinvigoration of their economy may now be misguided.   

And speaking of the former, it was quite interesting that the Reserve Bank of Australia eased its base rate by a full half percent at its May 1 meeting, versus anticipation of only a 25 basis point cut. The minutes of that meeting released on Tuesday , provide ample fodder for why they eased so aggressively. Outside of their mining sector it appears that much of the economy is weakening amidst concerns about employment and consumer confidence. There was much discussion of below trend growth, and that extends to concerns about the global economic environment.

Relatively Stronger US versus a Lot of Weakness Elsewhere

This is a psychological condition for the markets we have noted for a while. Yet, for quite some time the economic and equities bulls were attempting to characterize the weakness as only limited to Europe. And some of them were even audacious enough to pose the question, “Does Europe really matter?” As we were quick to point out, even if the economic weakness in Europe was already factored into global economic growth expectations, there were still two issues which had to be considered.

The first is that the economic weakness in Europe was not likely to be contained within the Continent. Part of the consideration of Chinese weakness is the lack of demand from one of their key export markets. The second is that the assumption of a European dislocation not impacting the confidence in the global financial sector was pretty far-fetched.

And as we noted in our Weak data, France headed for Socialism, ECB against stimulus… post (just after the ECB meeting two weeks ago), there was definitely a ‘dislocation’ in the psychology that was just waiting to hit the markets as well. Of course, that context for a more extensive downside correction in the equities got a significant assist on that Friday (May 4th) from the next round of weaker than expected US Employment data.

And that dislocation is now in full force in the wake of depositor runs on Greek banks. Both in terms of its relative economic insignificance and indication that the previous bailouts have left the banks insolvent, many were feeling there was not much more Greece could do to upset the global markets. Well, the intertwined nature of the global financial services industry comes home to roost once again. There are now concerns about depositor runs on the far more important banks in Spain and Italy.

And as far as the strength of the US being able to offset weakness almost everywhere else, that’s a pretty tall assumption. Once again there are two aspects of this. The first is that the ‘delinking’ which was so highly promoted by many analysts in the wake of the October 2008 Crash is a myth. There are certainly significant leads and lags in the global economy. Those have always been there, and have only been exacerbated by the significantly divergence between economic cycles in different countries. As such, to believe that the US can avoid or wholly offset weakness almost everywhere else is a fantasy.

The second aspect of the assumption of US strength is that it is problematic; at least  more so than the bulls would have the rest of the world believe. There have been some significant highlights in US data missing elsewhere in the world. This month’s Manufacturing Purchasing Managers Indices are a case in point; as the US looked very good against significantly disappointing indications from most everywhere else, especially Europe.

However, along with other strong data like yesterday’s US Industrial Production and Capacity Utilization, there are significantly weak aspects as well. As a case in point we have just seen much weaker than expected readings on Philadelphia Fed and US Leading Indicators. As such, the technical side of the ‘macro-technical’ equation is very important as a guide to the overall global economic context. The best indication in these highly mixed fundamental (i.e. macro) influence circumstances is often to ask what the markets are telling us through their technical trend indications.

Confirmation From Other Markets

Inflation remains reasonably high in the context of the relatively weak global economy. Yet, there are signs from key markets that the potential for more serious economic weakness than the bulls could possibly imagine are being priced in once again. In the context of all of the current and prospective central bank liquidity measures, it is very hard to speak of actual headline deflation. However, it is possible to speak of a weakening of inflation to uncomfortable levels if the global economy does indeed end up weaker than the economic bulls would like to imagine.

That is most prominent in the June Gold future slide back below the significant low-1,600 area support. That reinstates the DOWN Break from last December. Even though there is some support around the 1,526 low left back at that time, the extended support below 1,600 is not until the mid-low 1,400 area. And far more important than the sheer extent of the break is the question of why Gold is aggressively extending its selloff from the February high up near 1,800?

Given the re-ignition of the European Crisis, Gold should be seeing a significant ‘haven’ bid. However, the limited periods where financial turmoil is accompanied by weaker Gold prices tend to be those where the immediate impact of the crisis is feared to be extended global economic weakness. That certainly could be the case in this instance, due to the fragility of the global economy at present.

There was an excellent Financial Times Short View column on all this yesterday morning by the estimable James Mackintosh. He ties together a lot of the same threads that we have been discussing of late. And the online versions of that column also has a video that includes interesting graphics. There is a chart on the historically atypical ‘strange bedfellows’ concurrent rallies of Gold and primary government bonds (i.e. lower bond yields) finally delinking. Another points up the degree to which the Gold trend is now more consistent with the weak general commodity trend. Certainly worth viewing.

And speaking of commodity trends, Gold does tend to be more speculative in its nature. The real bellwether of economic activity and sentiment tends more so to be Copper. The trend in the more industrial metal has been a good indication of industrial activity sans any speculative ‘haven’ component. While we do not normally include the trend of Copper in our coverage, it is important to revisit from time to time at the key macro-trend economic junctures.

After pushing to a new all-time high of 4.63 in early 2011, it stalled on subsequent rallies right around 4.50; yet held very well somewhat below 4.00 on setbacks between May and August of last year. After the market turmoil last summer brought it down to roughly 3.00, it stabilized and posted a 3.65 UP Break out of its downtrend in January. Yet it was never able to push back above 4.00, and multiple retests of the 3.65 area finally succumbed this week to a failure well back below it. And a Negated (i.e. proven to be false) UP Break tends to signal an extended move to the downside.

Once again, rather than the sheer extent of the selloff (which has further support down in the 3.20 and 3.00), it is important to note this as an indication of weakening industrial demand. Some very prominent mining companies are currently suspending operations due to lack of demand. That is all consistent with our view from last Friday on the strong headline numbers masking what is ultimately lower overall economic turnover.

That has been true for a while in the Employment numbers for the US and Australia, as evidenced by the lower Participation Rates. It was obviously also true for the recent better-than-expected Chinese Trade Balance; that was based upon an implosion of the Import figure. Even the US equities have been acting like the better news is not to be trusted, and the bad news might continue to accelerate. All of which is even more so the case if financial ‘dislocation’ is being cooked into the equation once again by the problems in Europe.

The Next Step

Funny enough, the European component of the current market concerns puts us right back in a situation that we have mentioned quite a few times since May of 2010. It seems we are back to another Euro-zone/German “Show Me the Money” Moment. While they may have brought it upon themselves by not moving more forcefully early on, one must feel some sympathy for Chancellor Merkel and her minions.

And it’s kind of ironic that this should have a modern Italian artistic context. They must feel like Michael Corleone near the end of Godfather III when he notes in frustration, Just when I thought I was out… they pull me back in.So Frau Merkel and her northern tier European cohorts finally approve expansive ECB liquidity provision (through the Long Term Refinancing Operation) and put up a huge amount of money to underwrite the performance of the European Financial Stability Facility (EFSF) and European Stabilization Mechanism (ESM), and what does it get them?

Pretty much nothing if the Greeks are actually going to reject the austerity agenda. Of course, that was the real point of the ‘disconnect’ we noted after the last ECB press conference. With the French joining the anti-austerity party, and even the domestic audience in Germany signaling their dissatisfaction, how do you enforce an aggressive fiscal rebalancing agenda?

Answer: you can’t force austerity if the population at large is not going to accept it. Yet, the better question is what comes in its wake? As we noted at more than a few junctures even when austerity was being fought by various governments and their respective vox populi, you will still get austerity. But it will come from a far more blunt and unmanageable force: the unrelenting merciless verdict of the sovereign bond markets.

That already seems to be occurring throughout Europe for the less credible (or should we say, less ‘creditable’) sovereign borrowers. And one can only imagine where it all ends up. That will only exacerbate the expansion of the yield spreads between the favored few and the shunned periphery of Europe. With primary government bond market yields still drifting into new all-time low territory, those spreads might be less important than the overt yield levels for the periphery.

That said, what we know in the short term is that equities will likely suffer, and the primary government bond markets will keep and extend their ‘haven’ bids. And that likely ends up in another massive round of central bank liquidity infusion to prevent credit market problems. Irony abounds, as this will have to be funded to some degree in Europe by the still reticent Germans and their cohorts.

Of course, the further irony is all of the recent central bank talk of no further quantitative easing, unless of course conditions warrant it. Get ready for Federal Reserve QE3, even if they can’t reasonably use the term quantitative easing again. Along with the ECB (and possibly the Bank of England and all of the European countries’ central banks) they will all figure out a name for it.

And that may just barely pass the popular ‘sniff test’. Because just like in the United States back in 2008-2009, the public and the political class may not like it, but they won’t fight it if they’re told it’s the difference between some inflation risk and the next Great Depression.

General Market Observations

Prior to this week the equities had put in a relatively resilient holding action from the key June S&P 500 future 1,338 Tolerance of the 1,355-50 general support level. However, Monday’s gap lower (from last Friday’s Close exactly at 1,350.00) into a Close below 1,338 was ugly. While the US market has been orderly in terms of day-to-day trading which was not so aggressively bearish, it has indeed “walked down the ladder” into each day’s Close and another new trading low today. And unless it manages to rebound nicely before the Close, it will already be challenging its next significant interim supports. Those are at 1310, and the daily Head & Shoulders Top DOWNside Objective in the 1,297-95 area. Much below that the more major lower supports in the 1,260-1,240 range are likely to be seen.

It is of note that June S&P 500 future holding that 1,300 area interim support is likely contingent on some relief from Europe. That is because the German DAX Index is right into the 6,300 area major support we have been citing over the last couple of weeks. A failure below that area would put the market back in an entire lower range. While there are further interim supports is nearby as 6,050-6,000, the more major lower supports in that range from last summer and fall are not until the mid-5,000 area and the low-5,000 area.


These are still significantly the same as the technical projections just below the calendar in the right-hand column. We will also be providing a further update of these indications after the US close today to prepare for the important end of week closings in the other asset classes.

Thanks for your interest.



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