If the reach for yield phenomenon that has taken over the markets were ending, where might we see the cracks?
Perhaps in the kingdom of low interest rates, Japan?
Or perchance we might gaze a break down the US treasury market?
And by extension the gold market which has also been a beneficiary of this irrational fear that rates will be low forever.
With bonds, stocks, gold, real estate all selling off at once, you start to worry about the sustainability of TINA. With bollinger bandwidth at a record low the SPY was down over 2%. The VIX has exploded 30% higher. TLT down over 1.5%. The serene calm of the summer market has officially ended.
What sparked this event? It was the Fed’s unwillingness to back down from its threat to hike rates in 2 weeks time. The market doesn’t like that. The market doesn’t like that at all. I don’t believe the market will tolerate the Fed hiking rates and it will happily let the Fed know that.
For me the question of where the market goes over the next few weeks depends on the speed at which the Fed can communicate to the market that it won’t hike rates this month.
Which reminds me of January. The Fed had infamously hiked the month prior and the market after a long quiet period from the holidays just opened in the red and never stopped. While the market was in free fall, the Fed continued to talk about the number of rate hikes they were going to do this year…
Lest we forget it’s September and they are still talking about hiking interest rates. Now why they are hiking interest rates may be completely unrelated to the actual health of the economy and have a lot more to do with the strength of the Japanese Yen, but that’s for another time.
The point is, the market is going to ask the Fed to not hike. Just how polite the market is in its request depends on how it takes for the Feds to capitulate. Apparently it won’t be too long.
That’s one down but we still need a few more magicians to cast some incantations if they want to stop this self induced stock market stupor. After all, the sheer amount of leverage on the long side of both bonds and stocks due to risk parity and short volatility etfs combined with deaf and blind bid for “low vol” stocks has turned into one of the biggest bubbles in a long time.