The Banking and Strategy Initiative

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The Mid-week Trading Update: What Taper, Fed? Take care of the Debt Ceiling for us Lew!!

Of course, it is not easy for the US when the Republicans have only the Debt ceiling debate to make themselves felt in Government but that’s how it will be for administrative blunder reminders like having a Debt ceiling to raise every six months. Thus on the main topic.

Pre 1400 ET:

Question of the Day – What if there’s no Taper?

Aye, the doves have it. And with the usual smooth selling by Bernanke himself and Bullard and Evans since May; it may well be that the currency markets already trading down the news of the Taper first trade the 1400 ET gongs to kill the entire Dollar rally since May 21. The Pound is already knocking at 1.60 and the new safe haven candidate, the Euro has likely UK exporters rushing in to book forwards at it rises above 1.34 in this week’s trading window selling it before the Fed announcement. All in all, the markets are so used o the Taper announcement in their mail box and on screens in 6 hours that those trading nakd equity otions on SPY may well get a shock. The Fed announcement is therefore likely sfer to trade on the Yen unless there is no taper or a hawkish taper and the Dollars is being sold anyway taking the Pound back up with the Euro

Lehman Brothers Rockefeller centre

Lehman Brothers Rockefeller centre (Photo credit: Wikipedia)

The fundamentals behind the not Taper decision – unlikely great Holiday season spending signs from a levered consumer already avoiding card sending and the increasing 10th of the population that is unable to return to employment for structural reasons causing a big economic bugaboo just months down the line as real incomes refuse to rise. The problem can be more acutely and obviously seen in the UK where the currency has rushed to 1.60 levels at the first small signs of growth and runaway inflation ( barely above 3%) has not slowed down or caused any increases in income even as the quasi stable conditions are here to stay. However, an equally valid ‘bear condition’ for the day’s trade could be the Fed starting small but sure n the Taper as the markets are also unlikely t fathom a number for the Taper below $10 Bln. What sense, after all does buying $80 Bln worth and calling it the Taper make, anyway!

The Bonds in either case would follow the trade on the Dollar at 1400 ET and hat may well change everyne’s equations of the confidence trade built up to the Wenesday , today, afternoon especially as the FEd also shares the longer term outlook in this quarterly meeting sharing its read acoss nine districts for what will be the US economic situation in 2016

However, the Taper that likely will start with a $10-15 Bln reduction in purchases was also never really promised for September and may well wait for December given the tentative recovery and thus it not happening today would probably now man a thumbs down on the American Recovery given that this is the stable situation after five years of pumping in QE and equities seemed to have factored n a sizable tickt for the confidence from the Taper

Today’s Housing starts data will remain under a million homes but still shows a healthy year on year growth and though upmarket America (Toll Brothers customers, as on CNBC by Coy CFO) had indeed never been strained by the crisis, the mid market and first time buyers can hardly complain about 5% + mortgage rates so rising yelds are unlikely to cause any hubris in the housing market even as the refinancing noise slows down business

Importantly a huge cliff has built up in the equities market as the day goes by, increasing short positions in banks already suffering from lower incomes this qurter in the worst run upp of yields thru the quarter. That does raise the chances of a big cascade when the announcements comes on either side of $10-15 Bln the markets have signed on to. However year end and 2014 targets for yields and indices are almost irreversibly bullish now with a higher than 4% final yield for the 10-Year Trsry and the S&P 500 at or over 2000/Dow 17-18,000

Jeffries’ getting boxed out of the rates, commodities and even Investment Banking advisory business as they reported q results do not help banks’ case as banks look to upto a 20% cut again in FICC incomes a virtual achilles heel that has failed to bring ack the buzz ever since the Lehman event that completed its 5th anniversary earlier this week

Also, the taper in MBS may well be lost just like the concomiant buying MBS refused to bring down mortgage rates at bans. Banks look forward to better than 5% mortgage rates and may not respond to Fed ‘s efforts as demand from first time buyers continue

1400 ET: NO TAPER!

Equities indeed celebrate as Fed admits the recovery is faltering in Housing

It is probably what the Fed Doves originally intended to transmit when they proposed a data dependent taper till mid 2014, but as the event was priced in the spring recoil jumped Gold prices more than $30 and Crude that has been rising all day on the susense of the Fed’s final decision impact

However, the Fed expressly added in its statement at the beginning, a reassurance that can withstand as long as one is sure of the next Fed President to be

The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.

The markets will also likely get in tune with the fact that the recovery does not get better than this for an equally wild negative swing later this week and the short trade in banks is also being unwound with the Dow shooting up 150 points on the news

Blaming the tightening Financial conditions for the possible dent in the recovery the FOMC statement also clarifies:

 In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.

10 Yr yields are down to 2.73% level down from 2.90 minutes ago as Bonds unwind giving equities the fillip to sustain this vote of (lack of ) confidence in the recovery by the Fed. NASDAQ 100 is up to 3770 and the S&P 500 at 1770 well on route to 2014 targets

The Fed outlook keeps rates low till 2015 but notes slower growth rates in 2013 and 2014 , 2% from 2.3% and 3% from 3-3.5%

The longer term growth also tops off at 2.5% with a small increase in the minimum unemployment because of the structural impact and an overall improvement in unemployment data tendency for 2014 and 2015 Inflation range is smaller  in 2013 and 2014 but essentially remains in control allowing Fed to taper from December

The Ben Bernanke Press conference starts in 5 minutes.

USD will be under pressure for most of the remaining week as most dollar based depreciation in Global currencies was effected to reallocate post Taper funds and the Pound should thus jump the fastest closely followed by the Euro

US Crude will probably fall back to $106 levels

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