Friday 19 June 2020

Where does the bear market rally stand?

Fed QE is over for now but might not matter that much for a few months. Treasury crowding out last time showed up with a curve inversion and its a little hard to invert the curve at ZIRP, but anything below 40-50bps on the 10yr I would see as major warning sign. In fact any break below 60bps. 

https://wolfstreet.com/2020/06/18/fed-ends-qe-total-assets-drop-liquidity-injection-ends/

But other CBs still expanding so USD may slightly rise over summer? 

In the short term today we had the quad witching and with VIX in low 30s and dealers rebuilding theta it should drop next week and technicals push the market higher. I would really like to see the VIX in the teens and CTAs fully long in the next move higher. 

S&P might break through the resistance at 3214 which is the January low it was struggling with but normally you get a risk off in the summer holidays, then perhaps a bounce into election as both sides promise deficit spending, but then not make a new high while internals weaken. 

Many other assets might not rally much from here. Look for a flattening TSY curve, reasonably supported USD and peripheral assets start to flatline.



In 1929 the market bounced for about 5 months after the initial sell off, and that was under a hard money standard with no QE.

I have no idea how many of the jobs losses will be recovered in 3-6 months but it will be far less than 100%, even 60-70% would be a borderline miracle and after that, it will be the slow grind that can take years.


After the election, Trump, who I assume wins, doesnt really need to care about the stock market, he has the real economy to worry about and he cant magic up corporate margins during the worst recession since 1929. Particularly when it becomes clear the recovery is drawn-out, defaults are picking up and Schumpeter comes back from the dead like the ghost from Christmas past.