The Week Ahead Is Mostly About Digestion


Federal Reserve Chair Powell increased the public information set about the balance sheet.  He indicated that the balance sheet may be closer to its optimal size than recognized and that, although it is not an active policy tool now, it could become so again.  It also seems possible that the Fed could taper the unwinding as it did with the asset purchases.  The Fed also gradually increased the pace of the roll-off before reaching the current target of $50 bln a month (though operationally, it is falling short of its target).  


The large countries are still too weak to normalize monetary policy.  The immediate reaction was to buy risk assets.  Global equities rallied.  The MSCI Emerging Markets Index rallied 8.7%.  The strongest of the major currencies were the dollar bloc, often seen as levered to global growth, and an expression of risk appetites.  The high volatile South African rand was the strongest currency, appreciating 8% in January.   


However, the V-recovery after the December plunge has now approached key areas. The MSCI EM Index peaked in early February 2018, and the bounce has brought it near the minimal retracement levels that one might expect. Other major benchmarks are near key levels. Our target for the S&P 500 has been 2700.  It was a conservative target, just below an important retracement target and the 100-day moving average, which the benchmark has not traded over since mid-October.  The S&P 500 surpassed our target with the help of the Fed's dovish pivot.  Europe's Dow Jones Stoxx 600 is also testing its 100-day moving average and a retracement objective.  The Nikkei is knocking up against 31000, which support in Q4 18 


No impetus will come from the Chinese markets, which are closed for the entire week for the celebration of the Lunar New Year. The Shanghai Composite posted its highest close since the middle of December ahead of the holiday and posted its fifth consecutive weekly advance to end a three-month swoon.  It is as if the equity investors are anticipating the next phase in the cycle--Chinese reforms and stimulus bear fruit.  


The US cut taxes and boosted spending and lo and behold the deficit got larger.  The market has to digest the supply that it entails.  Moreover, the Federal Reserve's bid is smaller than was the case previously (before Q4 18).  Foreign central bank intervention also may have eased suggesting that the private sector has to buy more.  The flatness of the US curve makes it expensive the currency risk for foreign investors.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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