Kruger Insights Friday – November 22, 2013 by FirstMacro

BinaryOptionsNow | Published on November 22, 2013 at 11:00 am

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Neither Here Nor There – Quite the hodgepodge on Thursday with the market all over the place. Where to start. Well – it isn’t too often that you see currencies like Aussie and Kiwi grouped together with the Yen. All three of these currencies were standout underperformers on the day. Traditionally, it is more common to see Aussie (Kiwi) and Yen on opposite ends of the spectrum. Yet, on this day, these markets were linked together in some strange corner of the universe. So how did this translate from a risk perspective? Here is where it gets even more perplexing. On the one hand, US equities managed to once again negate the most marginal of dips, only to rally back just shy of the record highs from Monday (stalled at 78.6% of weekly high-low move). Yet at the same time, the EUR/CHF cross rate (which I consider to be a formidable sentiment indicator), did not confirm the equity bullishness, trading lower on the day. But if we are to really break things down, I think we need to assign the Yen weakness less to any risk on trade and more to the high probability that a Fed policy reversal results in a widening of yield differentials out of the Yen’s favor. If we can reconcile the price action this way, then almost everything makes sense. The US Dollar is broadly bid with risk correlated currencies more exposed on the anticipated shift in yield dynamics. So Kiwi weak, Aussie weak, EUR/CHF lower, Yen lower.

kruger insights november 22, 2013

No Asset Bubble You Say? – This leaves us then with only the equity market price action to contend with. If markets are in fact pricing in a Fed policy reversal as evidenced by the currency reaction, why then are stocks not responding with the same level of trepidation. Equities continue to confound, ignoring the warning signs from the fixed income market, and refuse to show any sign of let up. I know some Fed officials have said that they do not see any asset bubble, but it is hard to think of anything but when you have a market that is singularly tied to its expectations of limitless Fed policy accommodation. So where to from here? I see us now transitioning into a period where US economic data is still not amazing, but at the same time good enough to convince the data dependent Fed it needs to initiate a taper. This should not do anything in the way of stifling the economic recovery ( and should actually encourage it), but at the same time, should also result in a period of medium-term weakness in the stock market (as this reality is finally absorbed). It stands to reason that if stocks were in fact so well supported by the Fed on the way up, they should be rather vulnerable when the Fed finally removes itself from the equation. I know many of you still don’t think the Fed will move to taper any time soon, but there is certainly a growing consensus at the central bank that this is exactly what should be done sooner than later. Still, we will need to see an S&P break back below 1775 at this point, to encourage the law of gravity. Have a good weekend!

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