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How the Federal Reserve is Showing Financial Fear
Have you heard about the Fed’s 180 degree turn?
By Elliott Wave International
Think about one of those movie scenes when the leading man does all he can to defeat the big, bad enemy — punches, kicks, slams, stabs, shoots — but the bad guy just won’t go down. In fact he doesn’t even look fazed.
That’s when the protagonist really starts to worry.
In real life, that’s where the Federal Reserve finds itself today.
The central bank has thrown everything in its arsenal at the economy, but most key economic metrics have barely budged.
In the epic struggle, the Fed’s policy has been turned upside down.
In the latest Elliott Wave Theorist, Bob Prechter noted:
The Fed has changed its policy, and it has done so in dramatic fashion. Look at this history of what the Fed has done.
Prechter continues his commentary:
You can go all the way back to 1929, and [the Fed] was doing what its job is supposed to be, which is to put dampers on exuberance and only make money easier when the markets are down and the economy is contracting.
Following that plan, the Fed raised the discount rate in 1929 to 6%. Here at the 1937 high, it raised margin requirements and bank reserves. In the 1968 bull market, when the public was excited about stocks, the Fed raised margin requirements and raised the discount rate to 6%. In 2000, right at that high, the Fed again raised its discount rate to 6%. In 2006, when the housing market was topping, and a year before stocks topped, it raised it to 6%.
What is it doing now? The market is right back in the rarified areas that it was when the Fed dampened speculation, but now the Fed is doing the opposite. Not only has the Fed not raised the discount rate to 6%, or even to 1%, but it is keeping the Fed funds rate at zero, and it is promising a 0% Fed-funds rate through 2015, three whole years.
This 180-degree turn tells me that the Fed is in a panic.
The Elliott Wave Theorist, Special Video Issue, October 2012
If the Federal Reserve itself is frightened about the financial future, perhaps you should be concerned too.
Why do The Fed and other central banks around the world keep making these types of mistakes? You can find out for free. See below for details.
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This article was syndicated by Elliott Wave International and was originally published under the headline How the Federal Reserve is Showing Financial Fear. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Slip Slidin’ Away
By Bill Bonner, billbonnersdiary.com
“US Economy Slips into Reverse,” was the headline in yesterday’s Financial Times.
The economy didn’t move ahead in the last quarter of 2012. Instead, it contracted by an annual rate of -0.1%.
That didn’t seem to bother anyone. Investors hardly noticed. The Dow slid a little, but not much.
In the bar car, journalists generally dismissed the whole thing. It
was a kind of optical illusion, they said, caused by the fact that the
gunslingers had been a little slow on the draw in the waning months of
2012.
Perhaps on the South Bank of the Potomac they had heard that the
world was going to end on Dec. 12 and decided that further security
spending might not pay off. They had no defense against the end of the
world, after all.
Or maybe, as the press reported, they were just preparing for the
curtain to come down on their freewheeling, free-spending ways. That
too was on the calendar during the darkening days of last year.
Maybe morale among the terror fighters fell into a terror of their
own… and their generals, with downcast eyes, went around the Pentagon
switching off the lights and turning down the heat.
We don’t know what happened. But it didn’t seem to matter anyway.
Everyone said it was a fluke. The rest of the economy was OK.
Spinning in the Wrong Direction
Nobody seems to care about the increase in U.S. Treasury bond yields either. Since Ben Bernanke
announced his “QE to Eternity” program, bond prices have gone down
(and yields have risen). This is the opposite of what was supposed to
happen.
Everyone seems convinced that the economy is moving forward, even
though it is not. They’re also persuaded that we have the Fed’s “QE to
Eternity” program to thank, even though the drive shaft — bond yields
— is spinning in the wrong direction.
Bernanke is buying $85 billion worth of agency-backed mortgage bonds and Treasury bonds every month — trying to increase demand and push down yields.
If successful this will bring down long-term lending rates —
especially important to the housing industry — which will help people
borrow with the wild abandon they showed in the 2005-07 spree. Then —
according to the theory, at least — the economy will grow.
Go figure.
Collision Course
What we’re trying to figure is where this clunky old machine ends up.
We’ve just seen how spending slippage at the Pentagon can put U.S. GDP into reverse. Reports suggested that top brass wasted $40 billion less than planned in the quarter.
But $40 billion is only a tiny fraction of the feds’ $1 trillion
deficit. What would happen if they cut out the entire $1 trillion in
deficit spending to bring the budget in balance?
Theoretically, GDP would race backward 25 times faster… surely crashing into something.
No one seems worried about it. Which is probably because they see ol’ Casey Jones Bernanke at the controls.
Never mind that there doesn’t seem to be a direct link between
Bernanke’s gearbox and what actually happens to the wheels below. He
puts bonds into high gear — buying $85 billion a month… roughly the
same amount as the U.S. government offers for sale.
With that kind of buying power, you’d think the bond market would
get so hot you’d need to put your bid in an asbestos envelope. But no.
Instead, it cooled down. The yield on the 10-year T-note broke above 2%
yesterday.
What do we make of it? Don’t know yet. But at some point, observers
are going to notice that the train is going in the wrong direction and
that the conductor should have his license revoked.
All Pain, No Gain?
Michael Hasenstab is arguably the most successful bond investor of
the last 10 years. He runs the portfolio of Templeton’s $67 billion
Global Bond Fund.
Of U.S. debt, he asks, is that really a “safe asset”?
It’s not paying you anything and you have the risk of principal losses when rates rise.
There’s the potential for pain. Bu where’s the gain?
And the risk is huge. Bonds are near the top of a mammoth 33-year
bull market. Investors buy them for safety. But what safety is there?
The Fed is buying, trying to boost them up. And still they go down.
And so we have to wonder: Has QE reached its limit? If the Fed
announces another “QE to Eternity Plus,” will bond prices go up in
anticipation of more Fed buying? Or will they go down in anticipation
of more risk?
We don’t know. We’d like to see the Fed do it just to find out what would happen.
But this is a train we don’t want to be aboard when the word gets out.
Regards,
Bill
ECB still sees weak economy first half 2013, then recovery
The European Central Bank (ECB), which earlier today left its key refinancing rate unchanged at 0.75 percent, said the euro area economy would remain weak in the first part of 2013 and then gradually recover as the bank’s accommodative stance stimulates domestic demand and exports from the 17-nation area benefit from stronger global growth.
The ECB, which cut its refi rate by 25 basis points in 2012, said the risks to its economic outlook for the euro area remain to the downside due to weaker-than-expected demand, weak exports, slow implementation of reforms and geopolitical issues that could affect financial markets.
“These factors have the potential to dampen the ongoing improvement in confidence and thereby delay the recovery,” ECB President Mario Draghi told a press conference
Draghi’s expectation that the euro area economy will pull out of the current recession this year, but that risks are still to the downside, is a repeat of last month’s statement.
Inflation in the euro area is expected to decline further below 2 percent in coming months, based on oil price futures, and weak economic activity and well-anchored expectations should keep underlying price pressures contained, Draghi said.
The euro area inflation rate fell to 2.0 percent in January, around the ECB’s target of inflation of below, but close to, 2 percent. It was the first time in two years the inflation rate fell to 2 percent.
“Available data continue to signal further weakness in activity in the fourth quarter and at the beginning of 2013,” Draghi said, adding weakness reflected the impact of low consumer and investor sentiment on domestic spending, as well as subdued foreign demand.
“Later in 2013 a gradual recovery should start, with domestic demand being supported by our accommodative monetary policy stance, the improvement in financial market confidence and reduced fragmentation, and export growth benefiting from a strengthening of global demand,” he added.
Commenting on the liquidity of euro area banks, Draghi said that banks had repaid 140.6 billion euros of the 489.2 billion that they had borrowed as part of the ECB’s two three-year longer-term refinancing operations (LTROs), reflecting “the improvement in financial market confidence.”
In the the third quarter, the euro area’s economy contracted by 0.1 percent from the second quarter, which also contracted by 0.2 percent from the first quarter.
On an annual basis, the area’s Gross Domestic Product shrank 0.6 percent in the third quarter, following annual contractions of 0.5 percent in the second quarter and 0.1 percent in the first quarter.
The ECB expects the euro area economy to have shrunk between 0.4 and 0.6 percent last year, down from 2011’s expansion of 1.4 percent.
This year the economy is forecast to shrink by 0.9 percent or expand by 0.3 percent and in 2014 the euro zone’s GDP is forecast to expand between 0.2 and 2.2 percent.
USD/CHF: Greenback Looks to Weaken Against the Franc
The US dollar extends its downtrend with the Swiss franc today following a short-term consolidation from the steep drop yesterday. Trader sentiment for the Dollar-Franc has been propelled by movements in the stock markets recently. However, looming automatic government spending cuts in the US pose a threat to the Dollar, while the Franc looks to gain from economic data across the Atlantic.
The world’s largest economy could take a big hit from automatic government spending cuts even if Congress only leaves them in place for a month or two. The Congressional Budget Office said on Tuesday the cuts would translate into $42 Billion less in federal spending between the beginning of March and the end of September. Congress has been scrambling to find a way to postpone the budget cuts, but has shown little sign of progress. In its report this week, the CBO projected that the economy would grow 1.4 percent this year if the austerity measures kick in. At that pace, the jobless rate would average 8 percent in the fourth quarter, just above the 7.9 percent reading from January.
On the other hand, the Swiss National Bank’s foreign exchange reserves fell for the fourth consecutive month in January, as the Franc pulled away from the 1.20 per Euro limit the central bank imposed in September 2011. The SNB held 427.049 Billion Swiss francs in foreign currency at the end of January, compared with a revised 427.196 Billion for December. With sentiment in the Euro Zone improving gradually, there is an ease in pressure on the SNB to step in and defend the 1.20 limit.
Further, Spain’s Treasury issued 4.6 Billion Euros of debt earlier today in a triple bond sale. Yields were higher on the shorter-dated paper from previous auctions a month earlier, as debt issue reached above the top end of the target range.
The Greenback is in for more bearish pressure today as trades favor the Franc, which suggests a sell bias for the USDCHF. Nevertheless, it is pertinent to look out for price appreciation from likely technical corrections on the currency pair’s movement.
For more news, analysis, technical charts and candlestick analysis, visit AlgosysFx Forex Trading Solutions.
Gold & Silver “Trapped” in Tight Range, Volatility Near Half-Decade Lows, as PGMs Grab Attention
London Gold Market Report
from Adrian Ash
BullionVault
Thurs 7 Feb, 08:05 EST
The GOLD PRICE eased $5 per ounce from a 2-day high in London trade Thursday morning, holding above $1676 as Asian stock markets closed lower but Europe held flat.
The Euro currency held onto a half-cent rise as the European Central Bank kept its key lending rate at a record low of 0.75% for the 15th month in a row.
Crude oil rose with other commodities, but silver bullion remained unchanged for the week so far at $31.80 per ounce.
Daily swings in the silver price haven’t been as small as this week since spring 2007. Volatility in the US Dollar gold price has only been lower than yesterday on 15 days since mid-2005.
“The story in the precious metals market,” says Commerzbank’s commodities team, “continues to be the explosion in the price of platinum” – now 13% higher since the start of the year.
Palladium, which is also used primarily in the auto industry, is similarly “in a very bullish trend,” they add, while “Gold and silver remain range-bound.”
Technical analyst Russell Browne at bullion bank Scotia Mocatta calls the gold price “trapped” for the last month.
While the market may be “building a base” from which to rise higher, “We do not expect any speculative buying until the market can break 1695,” he adds, “a level which has held since mid-December.”
Commodity analysts at the World Bank forecast a 4% drop in the gold price by end-December, with a further 3% fall to $1550 over 2014.
“Most risks are on the downside,” says the World Bank’s latest Commodity Market Outlook, “as the pace of global recovery improves, including further easing of financial tensions in Europe.”
The recent “high gold prices have [also] attracted considerable investment in the gold mining industry,” the report adds, “not only to replace aging existing mines but also to develop new mines.”
China’s gold mining output rose in 2012 for the 6th year, Shanghai Securities News said today, confirming its world #1 position with a record 403 tonnes.
Together with China’s gold imports through Hong Kong of 524 tonnes (net of exports), that figure takes China’s domestic demand for last year to at least 926 tonnes.
Imports to India – the world’s #1 consumer nation until 2012, but with no domestic mine output – fell one-third by value over the first 9 months of last year, perhaps taking full-year shipments below 650 tonnes.
“[The gold] market is slow these days,” Reuters quotes a Mumbai bank dealer, “as overall sentiments are not so good because of [central bank] comments.”
After gold import duties were hiked to 6% last month, the Reserve Bank of India on Wednesday proposed strict controls on import quantities, perhaps forcing wholesalers to re-export certain quantities and use recycled domestic metal instead, to try and cut the country’s large trade deficit.
“If they come up with quota system,” says the dealer quoted by Reuters, “then market will become very ugly.”
The Rupee slipped back Thursday against the Dollar, but remained 5% above last month’s multi-decade lows.
Sterling meantime whipped violently as first Mark Carney – who takes over as governor at the Bank of England this summer – spoke before lawmakers in London, and then the central bank held UK interest rates at 0.5% for the 48th month in succession.
“[Economic] risks are weighted to the downside..[but] inflation is likely to rise and may remain above the 2% target for the next two years,” the Bank said as it also maintained its quantitative easing at £375 billion ($590bn).
It will now start recycling the cash from maturing government bonds, it said, into new purchases of public debt.
“Returns to QE have declined, particularly in the US, as the scale of programme has increased,” said Mark Carney, currently head at the Bank of Canada, to the Treasury Select Committee this morning.
But “unquestionably” the UK economy’s “considerable slack…will be a situation that merits considerable monetary policy stimulus,” when he takes over from Sir Mervyn King in June.
The gold price for UK savers today touched a 10-week high above £1073 per ounce.
It has risen more than 5-fold since King moved from deputy to governor in June 2003. Consumer price inflation has averaged 2.7% per year, against the Bank’s official target of 2.0%.
Gold price chart, no delay | Buy gold online
Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can buy gold and silver in Zurich, Switzerland for just 0.5% commission.
(c) BullionVault 2013
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.
ECB holds key rate steady at 0.75%
By www.CentralBankNews.info The European Central Bank (ECB) held its benchmark refinancing rate steady at 0.75 percent, as widely expected, and said it would comment on the decision at a press conference later today.
The euro area’s economy shrank for the second quarter in a row in the third quarter as the Gross Domestic Product of the 17 nations that share the single currency contracted by 0.1 percent following the second quarter’s 0.2 percent quarterly contraction.
On an annual basis, GDP shrank 0.6 percent in the third quarter, following contractions of 0.5 percent in the second and 0.1 percent in the first quarter.
Meanwhile, the headline inflation rate fell to 2.0 percent in January after remaining above
that level for the last two years. The ECB targets inflation of below, but close to, 2 percent.
BOE holds rate, QE target, but ready to provide stimulus
By www.CentralBankNews.info The Bank of England (BOE) maintained its Bank Rate at 0.5 percent and the 375 billion pound target for asset purchases, as expected, but added that it was ready to provide additional stimulus and did not want to derail the slow economic recovery by tightening policy to bring inflation back to target.
Euro Turns Bearish Ahead of ECB Press Conference
Source: ForexYard
Concerns about what the European Central Bank (ECB) would discuss at today’s press conference with regards to the EU economic recovery, resulted in the euro turning bearish throughout most of yesterday’s trading session. Additionally, other higher-yielding assets, including crude oil and the Australian dollar, took losses as investors shifted their funds to safe-haven assets. Today, in addition to the ECB press conference, scheduled to take place at 13:30 GMT, market volatility is also expected following the release of the weekly US Unemployment Claims figure.
Economic News
USD – Dollar Sees Gains amid Investor Risk Aversion
The US dollar saw gains against its riskier currency rivals, as concerns regarding the outcome of today’s ECB policy meeting boosted safe-haven assets. The USD/CHF gained more than 60 pips during European trading, eventually reaching as high as 0.9148. After dropping some 15 pips against the Canadian dollar during early morning trading, the greenback was able to bounce back later in the day. The USD/CAD advanced more than 30 pips to eventually reach as high as 0.9987 toward the end of the mid-day session.
Today, in addition to the potentially significant ECB Press Conference, dollar traders will want to pay attention to the US Unemployment Claims figure, scheduled to be released at 13:30 GMT. Analysts expect today’s figure to come in at 361K, slightly below last week’s 368K. If the expectations turn out to be true, investors may take the news as a sign that the unemployment situation in the US is improving, which could lead to additional bullish movement for the greenback during afternoon trading.
EUR – All Eyes on ECB Press Conference Today
The euro took losses against several of its main currency rivals yesterday, as concerns regarding the economic situation in the euro-zone caused investors to shift their funds to safe-haven assets. The EUR/USD fell more than 50 pips during the European session to eventually trade as low as 1.3493. Meanwhile, the EUR/JPY lost close to 140 pips during mid-day trading to eventually reach as low as 126.00.
Today, the euro-zone Minimum Bid Rate and ECB Press Conference are expected to be the highlights of the trading day. While the ECB is not forecasted to adjust euro-zone interest rates, the press conference will be closely watched for clues as to the current state of the economic recovery in the region. Any indication of an economic slowdown in the euro-zone is likely to weigh down on the common-currency during afternoon trading.
Gold – Despite Minor Upward Correction, Gold Remains Bearish
Gold was able to stage a minor upward correction during mid-day trading yesterday, but remained bearish overall as recent US dollar gains made the precious metal more expensive for international buyers. Prices increased some $10 an ounce to trade as high as $1677.90 before dropping back to the $1675 level toward the end of the European session.
Today, gold traders will want to pay attention to the ECB press conference, scheduled to take place at 13:30 GMT. Any signs that the euro-zone economic recovery is slowing down are likely to weigh down on the precious metal and cause prices to slide during afternoon trading.
Crude Oil – Risk Aversion Causes Oil Prices to Tumble
The price of crude oil tumbled during European trading yesterday, amid risk aversion due to concerns regarding the euro-zone economic recovery. Prices fell some $1.60 a barrel, eventually trading as low as $95.01 before bouncing back to $95.30 toward the beginning of the US session.
Today, analysts are warning that the price of oil could see additional bearish movement if the ECB signals during their press conference that the euro-zone economic recovery is slowing down. That being said, a lower than expected US Unemployment Claims figure could limit any losses oil prices take.
Technical News
EUR/USD
The weekly chart’s Slow Stochastic is close to forming a bearish cross, indicating that a downward correction could occur in the near future. Additionally, the same chart’s Relative Strength Index has crossed into overbought territory. Opening long positions may be the smart choice for this pair.
GBP/USD
The Williams Percent Range on the weekly chart has fallen into oversold territory, indicating that an upward correction could occur in the near future. Furthermore, the MACD/OsMA on the daily chart appears close to forming a bullish cross. Traders may want to open long positions.
USD/JPY
The Relative Strength Index on the weekly chart has cross into overbought territory, indicating that a downward correction could occur in the coming days. This theory is supported by the Slow Stochastic on the same chart, which has formed a bearish cross. Opening short positions may be the smart choice for this pair.
USD/CHF
While the weekly chart’s Williams Percent Range has crossed over into oversold territory, most other long-term technical indicators place this pair in neutral territory. Traders may want to take a wait and see approach, as a clearer picture is likely to present itself in the near future.
The Wild Card
AUD/NZD
The Relative Strength Index on the daily chart has fallen into oversold territory, indicating that an upward correction could take place in the near future. Furthermore, the Slow Stochastic on the same chart has formed a bullish cross. This may be a good time for forex traders to open long positions ahead of possible bullish movement.
Forex Market Analysis provided by ForexYard.
© 2006 by FxYard Ltd
Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.
Central Bank News Link List – Feb.7, 2013: Japan PM Abe: Deflation can be overcome by monetary policy
Here’s today’s Central Bank News link list, click through if you missed the previous link list. The list comprises news about central banks that is not covered by Central Bank News. The list is updated during the day with the latest developments so readers don’t miss any important news.
- Japan PM Abe: Deflation can be overcome by monetary policy (Reuters)
- Draghi counts cost of saving euro as currency rebounds (Bloomberg)
- FSA’s Turner backs Carney on broader central bank targets (Reuters)
- China central bank flags inflation concern on growth rebound (Bloomberg)
- SE Asia central banks seek overhaul of FX forward rates from Singapore (Reuters)
- RBS is fined $610 for Libor rate scandal (AP)
- Interest rates in Russia to stay high as central bank fights inflation (rt.com)
- IMF to India: Don’t give up on inflation fight (CNBC)
- Central Bank succession rumours hit Hungarian forint (naharnet)
- Romanian leu falls for 3rd day on higher central bank repo limit (Bloomberg)
- (Thai) central bank chief shrugs off pressure (the Nation)
- Tightening monetary policy won’t be effective in Maldives: Finance Minister (haveeru)
- www.CentralBankNews.info
