Swissquote: It’s not ‘black swan’, it’s just the Fed

Swissquote: It’s not ‘black swan’, it’s just the Fed

Fed
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By Ipek Ozkardeskaya, Senior Analyst, Swissquote

US stocks tumbled the most in a month after the US retail sales declined more than analysts expected in July, and the rising Covid worries and images from Afghanistan dented the global risk appetite.

But it’s too early to call for a sustained market correction. The US equities doubled in value after the March 2020 plunge, and some profit-taking and a minor correction are only normal at this point.

Major US index futures steadied during the overnight trading session, and may post gains again, today. There should be at least 2-3% daily losses that persist over a couple of sessions to ring the alarm bell.

It is not the case for now.

Activity on FTSE futures hint at a positive session in London, although the British big caps will likely swing between two opposite forces: cheaper pound will continue attract reflation trades to the bank and energy heavy FTSE, while softer energy and commodity prices should limit the upside potential above the 7200p mark.

The FOMC minutes is the major event on today’s economic calendar. Investors will be hunting for hints about the upcoming Federal Reserve (Fed) QE tapering. Yesterday, Fed Chair Jerome Powell said that the monetary policy has its limits. Yes, it’s called inflation: the major side-effect of boundless money injection.

Currently, the US equity markets are overdosed with cheap liquidity and keep posting new highs despite a sticky global pandemic, repeated lockdown measures, shattered economies, lost jobs, hammered lives and escalating inflation.

Strong earnings and the post-pandemic boom in activity explain a part of the equity bullishness, but the major bullish driver is the cheap Fed money and the FOMO - the fear of missing out the rally on cheap liquidity.

Therefore, any hint on QE tapering could have a meaningful impact on the market sentiment as we are talking about a change in one of the major pillars of the US equity rally, not to say THE major pillar. Naturally, the Fed pulling away support will feel like they are pulling the rug from under the market’s feet. But no stress.

While in 2013 we saw a bad market reaction to the tapering announcement, it will certainly be different this time. First, the market well survived the post-subprime QE tapering, and second the Fed officials have been preparing investors for the upcoming pullback in bond purchases. And the fact that the interest rates will remain near zero at least until 2023 is a good consolation for investors, which won’t settle for less than the equity returns for at least another year. The US 10-year yield remains comfortably low.

Yet some start taking their precautions. According to the latest news, Palantir is now buying gold and will even accept payments in gold as a preparation to a ‘black swan’ event, although a ‘black swan’ event is a rare and unexpected occurrence that have severe consequences, while a market selloff is well feared and anticipated risk by investors.

Gold, which remained mostly unresponsive to rising inflation expectations and low yields could get a breath of fresh air in case of a market turmoil. But for now, the equity space remains the major money-maker, and gold continues seeing a decent resistance near the $1800 area. I expect gold to remain under pressure as long as the equity markets drive north. Buying gold as a bad-day hedge is good, but costly in a market where equities post abnormally high returns and banks call for further gains.

But maybe, it’s just about time to position against the mass market, as it is generally when everyone calls for more gains that a downside correction happens.