18.03.2020 – Special Report. Wait a minute: Fed Chairman Jerome Powell has just promised low interest rates until further notice. Nevertheless, high-tech stocks are selling off for the time being. And bond yields are rising. Because the market believes in an interest rate hike in the wake of the feared inflation. But the Fed could also help the Nasdaq and Treasurys in the near future: Traders and investors should keep an eye on the acronym SLR. We take a closer look at the Federal Reserve’s latest major policy announcement.
Shared financial market
Divided joy on the financial market: The yield on ten-year US Treasurys has again reached the 1.75 percent mark, which is considered a critical level before the Fed intervenes. In addition to bonds, interest-sensitive growth stocks were also in a sell-off. The old economy was quite different: the Dow Jones just crossed the 33,000 mark for the first time ever as the Fed forecast the strongest growth in almost 40 years. The DAX also marked new records. The US Federal Reserve has announced that it will keep interest rates down until 2024.
The Fed lets the chips fall where they may
A mixed reaction to the coming floods of cheap money. The Fed is obviously willing to let inflation run – besides a Corona recovery, low permanent interest rates are fuelling the financial market. And they are causing a sell-off in government bonds. Which makes yields rise. For the danger of economic overheating looms – and the Fed has signalled that it will do absolutely nothing about it. Many traders believe that the Fed will have to raise interest rates at some point.
Let’s look at the context again: If you invest in long-dated bonds, you will get back much less money than you paid in at maturity in the event of inflation. An unprofitable investment. Hence the recent sell-off in Treasurys. And also the scepticism about growth stocks, where investors look closely at the returns. Because with high-tech stocks there are often no profits yet but a lot of hope: And for pricing, many analysts use the discounted cash flow model for their forecast of the future share price, where a higher interest rate leads to a lower share valuation.
More inflation
Accordingly, Jonathan White, Head of Investment Strategy at AXA IM Rosenberg Equities, commented: “Rising real rates have created a hostile environment for longer-duration growth factors. Looking ahead we continue to believe the environment should favour value stocks over growth stocks. “Neil Dutta of Renaissance Macro explained: “Passive easing continues. GDP has been revised up. Inflation has been revised up. Unemployment has been revised down. Despite all this, the median dot still at zero through 2023 though a few more see a hike. Chair Powell probably has time to help these folks understand the new policy framework.”
Look for the abbreviation SLR
The yields for US government bonds rose mainly because Powell avoided a clear statement in this direction. However, he could make up for this in the next few days. For the market, the important watchword SLR – Supplemental Liquidity Ratio – was still missing. In other words: this limitation for banks with regard to the amount of Treasurys versus reserves and account deposits could soon be relaxed. The financial blog ZeroHedge suspects that this could result in over $1 trillion more in bonds moving out of the market and onto bank balance sheets – which would lower yields again. Interestingly, Powell announced in his press conference that he would comment on SLR in the coming days. We add: The Fed could also additionally buy more long-dated US government bonds to push down bond yields. For now, the Fed continues to collect $120 billion worth of US Treasuries and mortgage-backed bonds per month.
These are the disruptive factors
Our conclusion: We assume that the Lord of Money will soon remove the last of the scepticism about interest rates. Then high-tech stocks should also rise, as well as Bitcoin. The dollar is facing hard times. And what else could stop the new money wave rally? For one thing, a prolonged dithering by Powell plus strong economic data – this would push bond yields up further. Then there are tax hikes in the US. It is fairly certain that the Democrats will raise taxes on corporations and high earners. Unless some members of Congress get in the way.
Furthermore, a continuation of the Corona lockdowns could spoil the party. For example, if the vaccinations had strong to fatal side effects. These obviously exist to a much greater extent than known so far. Interestingly, we have so far only noticed a well-founded, critical article on vaccination in the dissident medium “Achse des Guten” (Axis of Good) – one of the few publications that still makes a difference to the GDR in our press landscape. According to it, more than 1,500 people died in the USA between December 2020 and the beginning of March 2021 shortly after Covid vaccinations. That would be a completely new dimension. The website refers to the Vaccine Adverse Event Reporting System. The pro-government mass media in Germany and the USA are silent on this – of course, otherwise the rulers will turn off the money tap. So we are curious to see if the claim proves to be real – and if vaccinations are stopped. Which would be a new blow to the global economy.
Or else, Sleepy Joe will be replaced sooner than expected by Vice President Kamala Harris. Which would result in even more left-wing policies in the US – completely open borders, even higher taxes, a radical New Green Deal with the end of the US oil industry. Interestingly, the first ever press conference in front of the capital press is to be held next week with the aged and presumably demented president. Incidentally, after lapses at a smaller press event in Houston, even Democratic congressmen have demanded that Biden hand over the briefcase with the nuclear codes. We are keeping an eye on the matter for you – Bernstein Bank wishes successful trades and investments!
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