Kruger Insights Monday – December 16, 2013 by FirstMacro

BinaryOptionsNow | Published on December 16, 2013 at 3:37 pm

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Equities Front And Center – Of all the price action in the previous week, the most important was the price action in US equity markets. We have been through this many times in recent months, and I have been looking for a top all throughout that time. Now, once again, there are signs emerging of the potential for this top, following a very convincing bearish weekly performance from record high levels. Still, it is too early to truly make any calls at this point, but we are certainly getting concurrent confirmation on the fundamental front, following a slew of very solid data out of the US over the past couple of weeks. The big questions right now are what the Fed will do in the days ahead, and how exactly the markets will respond? This has been a Fed that has consistently erred on the side of dovishness, and I presume we should expect no different at the upcoming meeting. Yet what makes this interesting right now, is the fact that economic data is making it very hard for the Fed to continue to justify such excessively accommodative monetary policy. I have been in the camp arguing for some form of a taper in recent months, as I believe we have reached a point where the risks associated with continued accommodation are greater than the risks associated with a path towards tightening.

kruger insights december 16, 2013

Fed Needs To Be Careful Here – I don’t think the Fed needs to necessarily taper this month for the anticipated risk asset liquidation to continue to play out, and believe this capitulation could still transpire with a Fed that leaves policy as is, but at the same time, comes out with a very clear message that policy will be reversing imminently. At this point, if the Fed were to offer no indication of a taper, it would be damaging in my view. Why? Well because it seems we have gotten to a point where risk assets have taken full advantage of monetary policy. So what happens when risk assets have fully priced in accommodation? In this scenario, there is seemingly no place to go but down (if you agree risk assets have been supported by Fed policy). So now you have a market that is selling risk and a central bank that can’t do anything about it because all of its tools have been used up and it is fully extended. This is clearly a very dangerous scenario as promotes an unsettling environment. But if the Fed finally starts to taper, it sends a message to markets that things are actually getting better, and we are finally on a path to recovery. So even if risk assets sell off in this situation, at least the market can attribute the selling to the Fed’s tightening, and won’t be in a position of total despair (like the one where risk assets sell off and the Fed is still as accommodative as can be). What does this mean for the USD? If the Fed comes out on the more hawkish side, I would expect the US Dollar to see good demand across the board (Yen potentially only exception).

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