FOMC: Fear Of Missing Crash
It's the peak of summer and one of the busiest weeks for financial markets of this entire year. Tonight (Wed. Japan), the BOJ will likely raise interest rates again AND reduce their bond buying program, putting more strain on global financial markets. The critical moment that bulls were assured just months ago could never arrive, has now arrived. The BOJ is now actively tightening monetary policy at BOTH ends of the yield curve at the same time. And they are doing it at a time when their policy is 100% at odds with the rest of the world. Which puts Japan's 30+ year experiment with 0% interest rates at risk of unwinding.
July 29th, 2024:
"A perfect storm of political, policy and technical risks has upended one of the year's most popular currency trades, sending the Japanese yen soaring from 38-year lows with ripples spreading as far as Switzerland, Australia and Mexico"
"Carry trades involving funding in yen appear to be increasingly vulnerable to VaR shocks, similar to what we saw last week"
Japan is tightening at the fastest pace since 2007 while China is easing at the fastest pace in history far more than in 2008 and 2020.
The last two times China imploded, global stocks were close behind. This time around, global stocks are negatively correlated to China's economy.
For now.
Tomorrow the Fed is widely expected to keep rates unchanged and telegraph a potential rate cut in September which is still data dependent. Fed futures are currently showing a 90% probability of rate cut in September which means that the first rate cut is already priced into financial markets.
In other words, it's highly likely that we will see a sell the news reaction.
Led by Bitcoins which imploded after the June FOMC.
Microsoft reports earnings after the close tonight. Back in April they "beat" but the stock went lower initially before racing back to a new all time high. Now the stock has collapsed back below the April breakout level. If the stock implodes lower from this point then bulls will panic as the recent high was a confirmed bull trap. At that point bullish pundits will turn bearish and pretend they were right all along.
As I showed on Twitter, the sequence of this top is so far identical to the late 2021 market top. Growth stocks rolled over first and small cap value stocks rolled over last. Hedge funds are taking down their leverage ("de-grossing") which means they are selling their consensus Tech longs and buying back their consensus bank shorts. Which is giving the illusion of a new bull market in value stocks.
If the pattern continues then this FOMC bounce is the last rally before the new bear market is confirmed. Which will be even faster than in early 2022.
In summary, artificial intelligence is not as good as it sounds.
