Beware The ‘Tightening Tantrum’ And Fear The ‘Lights-Out’ Trade
Before you get too swept up in the prospects for a squeeze higher in equities into year-end, don't forget that the confluence of bullish technicals which have variously conspired to ignite a powerful rally off the late October lows are playing out against a backdrop of tightening financial conditions.
That's the message from Nomura's Charlie McElligott, whose recent notes have revolved around the dynamics that have helped the S&P log four sessions of >1% gains since October 29.
Those dy
While the speed of fed rate hikes may cause a more dramatic response, doesn’t it seem like three more gradual increases in the fed funds rate will be sufficient to tamper the upside in the market? It seems like we have fallen into a pattern where the Fed says it will continue to hike and analysts claim to understand. But once it happens, it just dominates the news cycle. The trade war with China willl continue for some time. Lighthizer wants to change too many aspects of the trading relationship, including weaknesess in the WTO. China is not going to quickly capitulate, and may just try to outlast Trump. Or perhaps Lighthizer will just lose favor with Trump. If there were a quick solution to the trade dispute, it would have happened before the mid-term. The Fed wants to be in a position to provide a stimulus in the event of the next receission, and they can’t do it from where we are. And after the most recent tax cut, the tool of an additional fiscal stimulus seems out of the question. The question is whether there is anything on the horizon that will make the Fed change course. Maybe falling asset prices, in housing and stocks. Maybe lower investment rates. But if the labor market remains tight, the pressure to increase rates will continue, whether gradual or not. And whatever gyrations we see along the way, its hard to see much potential sustained upside until the rate hikes end.
For a layman like me, re-reading this three times and finally deciphering 60% of the jargon and even some of the meaning is a victory. “Lights our trade”. Very descriptive indeed.