22 Mar IT HAS AND ALWAYS WILL BE PRIMARILY ABOUT INTEREST RATES
Equites were mixed Friday as long dated Treasuries stabilized. Quadruple witching hour was a none event, perhaps the result that many positions were already unwound. The prevailing and driving narrative has now changed to Treasury yields as FRB Chair Powell stated the central bank will provide aid to the economy “for as long as it takes.”
When I entered the industry about 35 years ago, I was required to read George Soro’s book “The Alchemy of Finance and Benjamin Graham’s book Intelligent Investor. A driving tenant of both books was interest rates.
All will agree the Federal Reserve has changed considerably since the publishing of both books but the basic tenant still remains. Interest rates [and monetary policy] are primary determinates of equity direction not vice versa.
Most will agree a major transition is at hand where the lows in interest rates have already been achieved. This is an easy statement to make for 12 weeks ago globally there was over $17 trillion of negative yielding debt, an environment thought impossible by every finance book in the known universe.
I nor do anyone else know what will happen tomorrow. However, if the low in interest rates has been achieved, the transition to what ever next could be volatile. The question at hand is the extent of this volatility. As both Soros and Graham emphasized it is primarily all about the cost of money and competing alternatives for that money discounted by current and expected cashflows and inflationary expectations.
Oh, for what it is worth department, chief investor officer for global fixed income at BlackRock opined Friday the bull market in Treasuries that commenced in 1981 is over. Not once between September 1981 and March 2020 did the Barclays US long Treasury Total Return Index decline 20% from peak to trough. BlackRock is the world’s largest asset manager.
Wow! I think this is really significant.
What will happen this week?
The economic calendar is comprised of various housing statistics, income and spending data and a sentiment survey. How will such influence market perceptions?
Last night the foreign markets were mixed. London was up 0.05%, Paris down 0.23% and Frankfurt up 0.27%. China was up 1.27%, Japan down 2.07% and Hang Seng down 0.36%.
The Dow should open flat but the NASDAQ up about 0.50% as Treasury yields declined as Turkey again replaced its third central bank chief for the third time in less than two years. The 10-year is up 13/32 to yield 1.68%.