Macro Morning: QEnd in sight?


On Saturday I was fairly comfortable that I had this week mapped out but the article in the Wall Street Journal by Jon Hilsenrath which is sourced inside the Fed and makes claims that they are contemplating the end to the current program of bond buying has given me reason to pause.

On the one hand this week we have the Barrons cover talking up stocks saying this bull market has room to run and we had some bullish analysis from Bank of America equity guys also released over the weekend which accords with the Fed’s underwriting of the stock market and the use of its balance sheet to goose stocks higher. On the other hand we have the Fed trying to get the message to the market that the stimulus effort is not really about infinity at all and they know there will come a day when they need to withdraw the free money and they don’t want either a stock market crash or a repeat of the bond rout of 1994.

Who will win depends on your time frame. If the US economy continues with its gradual but enduring recovery then the Fed is going to have to withdraw stimulus which is likely to put upward pressure on interest rates and in doing so also put upward pressure on the discount rate for valuing stocks income flows and thus reduce the NPV of those flows which makes stocks worth less all other things equal. That is a risk for stocks so it is going to interesting what reaction we see in the next day or so.

In truth I have no idea to be frank and have to await the price action as my guide but the next 24 hours might be interesting for stock traders. This is particularly so given that the Dow and S&P both made new all-time highs on Friday night closing at 15,118 and 1,634 respectively while the Nasdaq was 0.82% higher. The DAX also made a new all time high rising 0.2%, the FTSE was up 0.49%, the CAC rose 0.65%, stocks in Milan rose 1.13%. Stocks in Madrid closed 0.32% lower.

The outlook for the US dollar however seems more certain by either the slow recovery and the end to QE or the current status quo where the growth differentials are continuing to print in its favor. This is likely to reassert the preeminence of the US dollar at and likely drive the euro, yen and Aussie dollar all lower. What the Fed is signalling ultimately is a monetary policy shift at some point while markets widely expect the ECB, RBA and BoJ are going to have to keep cutting so we get an important swing there in support of the USD. Equally the current economic surprise index is strongly in favour of the USD relative to the economic outcomes in Europe, Japan and even Australia with the huge surprise in the employment numbers last week.

eur, eurusd, euro, euro (eur) price quote

So on Friday night the euro broke lower through the bottom of the recent trading range hitting a low of 1.2934. We went short in the 80’s and left a take profit on the night so we are square euro looking to get short again sometime today. The little uptrend from the March low has now been broken and our bias is for a move down toward 1.2840 region and then 1.2750.

aud, audusd, australian dollar, australian dollar price quote, audusd weekly

The Aussie has also broken down but far more decisively than the euro with a big break of a year long weekly range. We continue to favour a move toward the 200 week moving average at 0.9857, which is also the trend line in the chart above, as a first target and then we’ll see after that. Some people are thinking the Aussie is oversold and perhaps on the dailies and hourlies it could be but the weeklies have only just begun. As readers know we were about the first to get bearish the Aussie and now that the hedgies have all been talking about it a reaction in the opposite direction could result but the positives are being kicked out from under the Aussie and we are seeing sellers emerge on rallies not buyers on dips for the first time in quite a while.

In other markets GBP was under pressure and the yen too remains pressure up near 1.02 this morning. We continue to favour a move to 1.035o for USDJPY.

In commodities, gold reversed off the $1475 resistance and selling zone once again and it looks like the bounce and its momentum off the lows of recent times is fading and we are back to looking for lower levels. Gold closed down 2.18% at $1447 while Silver is 1.03% to $23.73 oz. Crude had a wild days trade before closing down 0.36% at $95.97. Dr Copper was up 0.43%.


In Australia we have Home Loans and the NAB Business survey. If you want a real read on the economy here it is today.

Industrial production and retail sales in China and then retail sales in the US tonight.

Twitter: Greg McKenna

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  1. I think that the end is still over the horizon. Bernanke seems to be in the Krugman vein – “credibly promise to be irresponsible”

    IMHO he will stop when it’s coming out of every orifice.

  2. Yes, Bernanke and Krugman were mates in uni even did thesis together. There will be no end of QE because their govenrnment will go bust the moment inerest rates on their 13T debt starts to rise. They are on permanent life supporting QE. Once they done suppressing gold price it will explode.

    • The Fed sets the interest rates, the Fed can print unlimited amounts of money. So how can the US government run out of cash or go broke meeting interest payments. In fact higher interest rates will ravage the gold price as Gold has zero yield and becomes unattractive in a high yield environment.

      Best of luck with that gold.