Trick or Treat

di Finanza Operativa 30 Ottobre 2017 | 18:30

A cura di Walter Snyder, Swiss Financial Consulting

There has been no crash or even a 3% correction so far in October. Halloween will be on the last day in October, the 31st. So there remain two more days for this Newsletter`s prediction of a market downturn to be realized. So far Wall Street has marked new highs in a narrowing market as tech stocks account for most of the advances. With the exception of the energy sector, earnings for the third quarter have not been spectacular, and the fundamentals already mentioned in previous Newsletters remain unchanged. High corporate debt, excessively high stock valuations, record lows of volatility, low interest rates with the Fed basic rate at 1% to 1.25% and US federal and consumer debt at record levels together with dim prospects for future ROI in the stock markets should enhearten the bears.

There is also great uncertainty in the global geopolitical situation, which does not seem to perturb the markets at all. President Trump has narrowed down the choice for the future Fed chairman to a dove and a hawk.  The dove will favor lower interest rates while the hawk would go for higher rates, around 4% to 4.5%. A choice of the former would mean more of the same while the latter would probably trigger a strong recession.

There are other factors that could influence the markets, namely, more central bank purchases. Mr Draghi has cut down buying to 30 billion a month, a sort of European tapering. The SNB (Swiss National Bank) has about 87 billion worth of US stocks spread over more than 2,500 positions according to a recent SEC disclosure.

The Fed has announced that QT (Quantitative Tapering) will be implemented in order to reduce the Fed’s balance of over 4.5 trillion at the initial rate of 10 billion a month so as not to disrupt markets. The end of the Fed’s policy of injecting liquidity into the economy will probably result in a tightening of credit and a rise in interest rates, two factors that would favor a recession.

Given all the uncertainty surrounding the markets, it is clear that the bulls have forgotten about risk and assumed that there is no imminent danger even of a correction. Market psychologists will remember 2017 as the year that the bears were cornered and it looked like the central banks had conjured away volatility. Is this time really different? Is price discovery an anachronism? Have the markets been tamed?

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