Blame It On Fed and ECB

Blame it on Fed and ECB

Since my last post titled “The Final Countdown – Indices Special” on November 21, 2015, two events of significance have occurred, viz.:

·         ECB reduced deposit rates by 0.10% to negative 0.30% and announced QE amounting to 360 billion euros extended till 2017

·         Fed chairperson’s testimony to the US Senate and persistence in view to get off the near zero interest rate tiger in light of robust US economic and jobs data indicating adequate and continued strength in the economy

The spontaneous reaction of the financial markets to ECB’s decisions was clearly visible in the currency and stock markets.

However these events left me in a confused state of mind. The confusion arose on the following accounts:

·         Why is Fed hell bent to raise interest rates on 15^th-16^th December 2015, when it did not raise it at times when the US economy and the stock markets were doing so well for many years in the recent past?

·         Why does the ECB have to reduce the deposit rates? What was the rationale behind this move to bolster Euro and how effective will be the ECB’s bond buying program of 360 billion euros to strengthen the Euro Zone economy?

NOW I AM CONVINCED THAT:

·         Central Banks do make mistakes and

·         Sometimes Central Banks make mistakes in series by their inaction/ wrong actions at wrong times and

·         They also:

o   Let the blame fall on themselves, and

o   Empower financial markets to prove that the Central Banks act wrong

Listening/ reading about Fed’s/ ECB’s statements, its actions/ inactions and listening to the subsequent commentary of the analysts has finally kicked my spirit this time to interpret these statements and actions.

I will make an attempt to interpret these in my way.

A. Fed’s Decision to raise the interest rates – Biggest Blunder by Fed as far as timing is concerned – Enjoy the roller coaster at FeDisneyland

I admit that the US economy is robust at this moment but the best milestone/ time to have lifted the cap has been left way behind in time; perhaps almost two years and a quarter back in time. Now that the US stock markets/ Indices are at their peak and ripe to show some ‘Correction’, raising interest rates at this juncture will only lead to the blame of ‘Correction’ being put on the Fed. Fed has already sown the thoughts of ‘Correction’ with the markets.

Please read the news article below. This article appeared on Bloomberg’s website:

“According to October's FOMC statement, Fed officials believe "it will be appropriate to raise the target range for the federal funds rate when …….."

According to Yellen today, she currently judges that "US economic growth ……2 percent". In short, she believes the conditions for a rate hike have been met.

Declaration came with the usual caveats: It is data dependent and a really bad November payrolls figure or some other negative shock (perhaps another dip in the stock market like we saw in August) could yet persuade the Fed to hold fire.

"We don't expect ….., so we have to assume that a rate hike is coming", says Capital Economics in a research note.

Beyond the first rate hike, Yellen stressed ………..zero. But frankly that estimate is 90% guesswork.”

My Interpretation

The Fed chairperson has handed over the tool for not lifting the interest rate cap in the hands of the Wall Street.

·         Message for Wall Street: When the option is available, exercise it.

In my opinion the damage is done now. Interest rate cap lift-off could have been deferred

B. ECB’s decision of QE to the tune of 360 billion euros

My Interpretation

No doubt that robust stock markets support the economy. When the stock markets are highly speculative and are due for correction, any quantum (be it “Too little” or adequate) of bond-buying will not lead the stock markets any higher. The effort of bond-buying program will be a waste.

The markets reacted by saying “Too little.” Here also the tool to put the blame on ECB was handed over by ECB itself to the markets.

In my opinion announcement of QE should have been deferred.

There has been no significant change in the graphs presented in my previous post. All my previous views/ stances remain intact.

Best wishes for the festive season.

Contact:

The author can be contacted at: riskadvisory@outlook.com

Disclaimer:

These extracts from my trading books are for educational purposes only. Any advice contained therein is provided for the general information of readers and does not have regard to any particular person's investment objectives, financial situation or needs and must not be construed as advice to buy, sell, hold or otherwise deal with any commodities, currencies, securities or other investments. Accordingly, no reader should act on the basis of any information contained therein without first having consulted a suitably qualified financial advisor.