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Central Bank isn't afraid of falling US stock indexes

2021-03-05

2021-03-05

I love you I’ll kill you. Review as of 05.03.2021Dmitri Demidenko

Central Bank isn’t afraid of falling US stock indexes

Does Fed have enough patience?

Even before the 2020 crisis, asset managers accumulated total assets worth $89 trillion, much bigger than the leading banks’ balance or the global economy’s size. Not being at war with an arsenal that big would be stupid. The problem is to find an enemy, but the latest financial events suggest that problem is easily solvable. The main opponent of the business sharks is the Fed that has armed them with huge monetary stimuli. However, the Fed isn’t hustling to ruin them.

The global economic debt has grown by $70 trillion since 2013. When interest rates were at the historical lows, the markets were calm. They believed they would defeat the pandemic first, and then they will pay off their debts. Unfortunately, the fast growth of US treasury yields was an unpleasant surprise that caused real panics. The Central banks of Australia and New Zealand had to use interventions as the local bond markets’ rates had shown the fastest monthly rally in the past 25 years. Japan is talking about protecting the target range of +/-0.2% on 10-year bond yields, and in Europe, the ECB is expected to step in. That’s predictable: they are not the US that can afford to live a happy and wealthy life.

And why not? True, the greenback’s consolidation and the steep growth of bond yields unsettled emerging markets, but who forced them into accumulating that volume of dollar-denominated debt? Who asked them to buy out US stocks and chase after stock indexes as if they were trying to catch a plane on a runway? It’s time to test bulls’ patience.

We aren’t dealing with Reddit plankton that is tracking down underestimated oversold stocks. We’re dealing with large longs in stock indexes, and $89 trillion is enough for rocking the boat and making all jump out. The generation that has no idea the S&P 500 market can be bullish will probably face the fact. They don’t know what to do, looking at the Fed with hope.

Jerome Powell must sometimes be thinking that he saved so many lives by refusing to become a doctor. Why should he want to help speculators who raised stock indexes to the top and started panicking? One should want to hide but falls into a stupor instead and can barely move like that claustrophobic lover that failed to hide in a wardrobe.

I think the Fed will have to step in if the rally of treasuries continues. Up to then, asset managers will test the Central bank’s patience and threshold of pain, using the best argument: I can’t agree with you, so admit you are wrong. Does Fed have enough patience?

Price chart of SPX in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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