Markets are still holding the breakout zone as support after a dull trading day yesterday, but saw price retest support during the futures. It could still be setting up for a consolidation period. Markets have a lot of news to digest. Second covid fears, geopolitical tensions (Turkey launched largest assault into Northern Iraq), and social rest issues in the form of riots and protests. Two other major market news which we will discuss are the jobless claims, and the Bank of England now expanding their Quantitative Easing program. Both which still are stock market positive as it ensures central banks will keep rates lower and will continue to provide easing measures. Stocks still remain the only place to go for yield.
Jobless claims have been showing a downwards trajectory in the number of layoffs. The numbers kept getting reduced every week. Well today, jobless claims came in worse than expected at 1.5 million versus 1.29 million expected. Marketwatch also says, “If people who applied for unemployment benefits through a temporary federal program are included, new claims totaled an unadjusted 2.19 million in mid-June.”
Almost 46 million Americans have now filed for unemployment claims since lockdown/quarantine measures began, and now analysts are predicting a second wave of layoffs. If all eight state and federal assistance programs are included, continuing claims totaled an unadjusted 29.1 million in the seven days ended May 30, the most recent data available. That marks a small drop from 29.5 million in the prior week.
Sourced from Zerohedge.
The data many watch for job recovery is continuing claims. This is slightly subsiding but not at the pace which suggests a recovery in jobs. This data is making people start to question those stunning and unexpected US non-farm payrolls data which came out on June 5th as continuing claims does not support the job recovery data.
Sourced from Zerohedge.
On the monetary policy side, the Bank of England (BoE) did expand their Bond-buying program as many expected. With interest rates at 0.1% there is not much the BoE can do unless it decides to follow the European Central Bank (ECB), the Swiss National Bank (SNB) and the Bank of Japan (BoJ) and adopt negative interest rates. To be fair to the BoE, most western central banks are in that spot. Yes, Fed chair Jerome Powell has said that negative interest rates is something the Fed does not want to do, but it would have to happen in order to attempt to reach their inflation targets. Not to mention traders and investors have priced in negative interest rates for December 2020/ January 2021.
The goal of negative interest rates by the Keynesians is to punish savers. Since people would have to pay the banks just for keeping their money in savings accounts, the theory is people would spend more which would boost the economy. What has happened is that people have actually decided to save more. They remove the money from the banks and hold cash or other assets. The Keynesians say this is because rates need to be cut deeper into the negative. They cannot admit they are wrong. This will eventually lead to a digital currency so people are forced to keep money in the banks with negative interest rates. They will have no option to remove and hold cash. Beginning to see this shift now as many people are afraid to accept cash over the fear it may contain covid and infect you.
With this new 100 Billion Pounds of QE, it takes the BoE’s Asset Purchase facility to 745 Billion Pounds. Also announced were changes in credit provision facilities to make it easier and cheaper for banks to lend money to aid in the recovery.
Pound futures sold off on the news.
This is in line with the actions of other central banks in this coordinated effort to keep things propped. Everything and anything will be done to keep things propped, with the Fed now buying individual corporate bonds…sort of like a QE for corporations. Certain other central banks have been buying stocks and stock ETFs for sometime. The central banks with negative interest rates have pretty much killed their bond markets as it is just the central banks who show up at the auctions. The amount of money printing and bailouts here is staggering. And more will come both on the monetary and fiscal side. Hence why President Trump wants negative interest rates as it would be cheaper for the government to service debts.
Once again, this is stock market positive. Central banks are creating an environment where you must be in stocks to make yield. Especially for fund managers. The whole asset allocation model of rebalancing from stocks to bonds and vice versa is not making sense. You are holding bonds now not for the yield, but for capital appreciation because the bonds you hold now will be worth more if the Fed goes into negative rates. This is going to lead to massive bubbles as money flows to stocks and other assets in a hunt for yield. This is why I think stocks can move much higher. Not due to optimistic recovery, but on how bad things are going to be. Central banks are doing their part to prop markets, and this could lead to much direct action on the stock markets. Black swan event is the only thing that can bring the markets down as I have discussed in previous posts on the markets.
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