Money and Markets: Investing Insights

It’s All About the Central Bankers Now

Mike Larson | Tuesday, July 26, 2016 at 4:30 pm

Market Roundup Dow 18,473.75 (-19.31) S&P 2,169.18 (+0.70) NASDAQ 5,110.05 (+12.42) 10-YR Yield 1.56% (-0.01) Gold $1,319.90 (+$0.40) Oil $42.80 (-$0.33)

Forget earnings. Forget economics. Forget everything else. It’s all about the central bankers now. I say that because two incredibly important policy meetings are getting underway. The Federal Reserve is gathering today and tomorrow to discuss interest rates and the economy, and it’s slated to release the results of its deliberations Wednesday afternoon.
Then on Thursday and Friday, the Bank of Japan will meet to discuss policy in that country. The results will be released in the overnight hours before Friday’s trading session here in the U.S.
One look at the surge in risk assets in late July … or the recent plunge in volatility … tells you everything you need to know. Markets want and expect tranquility (timidity?) on the policy front here, and aggressive action overseas. So will they get it?

Investors are hoping for moves to boost the economy when the Bank of Japan meets this week.

Well, no one (including me) thinks policymakers will actually raise interest rates tomorrow. That’s especially true because there’s no post-meeting press conference by Chairman Janet Yellen. But given the tone of the economic data lately … the wildly stretched valuations of riskier bonds and stocks … and the extreme complacency in the market, the Fed could easily justify striking a more hawkish tone.
As for the Bank of Japan, investors are hoping it will boost the size of its QE program from 80 trillion yen to at least 90 trillion yen … cut interest rates deeper into negative territory (from minus-0.1% currently) … or shift more of the QE focus to Japanese stocks or REITs rather than government bonds. There’s also plenty of talk about “Helicopter Money,” as I explained last week.
There is definitely a risk of disappointment, given the sky-high expectations. So keep that in mind when you shut down your computer for the evening on Thursday.

“There is definitely a risk of disappointment.”

But that’s enough out of me. What do you think we’ll hear from the Fed? How about the BOJ? Regardless of what they say, what impact do you think it will have on markets? Is there more room for stocks to run? Or have we already come too far, too fast?
Are you making any adjustments to your investments ahead of these meetings, or do you plan to make any after the news is out? I’d love to hear from you.
Until next time,
Mike

Our Readers Speak

I wrote yesterday about “jump” risk, and what well-known market commentator Mohamed El-Erian had to say about it in the Financial Times. Several of you responded by saying whether we should really fear it – or not.
Reader Gordon said: “I think five quarters of poor earnings, and the U.S. markets with positive yields, have removed much of the near-term negatives. More and more investors will invest here and drive the stock market higher by about 10 percent to 15 percent. We are the best alternative to negative yields.”
Reader Victor added: “The ‘diamond in the rough’ or ‘golden nugget of truth’ is that the major market movers are dependent on central bankers and all that that implies.”
Reader Tasmica weighed in by saying: “Mohamed El-Erian is clearly correct that a significant market change is likely at some point, and it may be that there will be news resulting in a sudden surge up followed by a reversal. After all, we have been overdue for a normal onset of a recession for a while now.
“That ‘jump'” could happen at any time, but the external factors that have extended the recovery period seem prepared to do what is necessary to provide market support through the November elections at a minimum. And if we do get that initial surge up before a reversal, it would be a nice time to take some risk off and/or add some short protection. Going to cash now, or a highly defensive stance, is a rational step. But it could result in missing several months, or more, of a continued upward trend in the equity markets.”
On the other hand, Reader Vinman sees at least one reason why the rally could falter: “El-Erian may be right. The Dow Transports still haven’t confirmed, and the markets were rising on lower volume. It looked like Transports were going in the right direction Friday, with over a 100-point gain. But they gave up 73 of those points yesterday. So it’s still a wait and see if they will confirm this rally or not.”
Thanks for sharing your opinions. If you haven’t done so yet, you can do so anytime in the comment section below.

Other Developments of the Day

The close ties between the Federal Reserve system and top Wall Street banks has long been a running joke. Former regulators and government officials often make the leap into private practice, reaping huge salary and bonus benefits as a result.
But now, the Fed is poised to slap a financial penalty of some sort on Goldman Sachs (GS) as part of an investigation into leaks of confidential information. A former New York Fed employee reportedly leaked information to a junior Goldman banker, who himself was a former New York Fed employee. The state of New York already forced Goldman to cough up $50 million for the alleged offenses, so anything the Fed extracts will be over and above that total.
Terrorist violence continues to rattle Europe, with two assailants breaking into a church in northern France today and killing the priest. Another victim was left with grave injuries by the two alleged terrorists, who police later shot when they exited the church in the small town of Saint Etienne du Rouvray.
Meanwhile, in Japan, a former employee at a home for disabled citizens broke in and stabbed 19 people to death. Satoshi Uematsu injured another 25, then turned himself into local police and confessed. It was the worst mass killing in Japan in decades.
Two more attacks – one tied to terrorism, one apparently the work of a mentally disturbed man – have shaken citizens in Europe and Japan. What, if anything, do you think can be done to prevent these kinds of horrifying incidents? On the financial front, is there anything that will fix the negative side effects of having a revolving door between government regulatory agencies and big banks?
And speaking of big banks, what do you think of this New York Times story, which notes that both the Republican and Democratic presidential platforms officially call for the reinstatement of Glass-Steagall restrictions? Those restrictions officially separated traditional deposit-taking banks from investment banks, but the Depression-era legislation was overturned in 1999. Be sure to take a minute to weigh in on these questions when you have a minute.
Until next time,
Mike Larson
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Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.