US tech stocks sink after FOMC minutes
Greetings from day four of managed isolation in New Zealand, and no, I’m not a tennis player. All the chatter overnight was about the implosion on tech stocks in New York after seemingly hawkish FOMC minutes from the December meeting. The US dollar reversed intraday losses and US yields firmed once again, but it was tech stocks and bitcoin that fared worst, the Nasdaq falling by 3.34%, and bitcoin slumping by 5.50%.
The minutes revealed that committee members felt inflation risks were more persistent and to the upside, and there was general agreement that the taper should be accelerated with three tentative rate hikes pencilled in. So far that’s exactly what we were told in the post-FOMC meeting by Chairman Powell. Nothing to see here. The only surprise, if you can call it that, is that some members felt that the Fed should commence running down its balance sheet soon after its first hike. I.e., selling some of those USD 8.50 trillion of bonds, etc. Nothing else was said in the minutes and the meeting moved on.
Normally the FOMC minutes is a big yawn-ster, and not market-moving. The fact that it spurred a massive rush for the exit in the most QE-driven pimp-up-my-asset classes at a casual mention of possibly thinking about reducing the balance sheet earlier says one thing really. That thing is that markets right through the holiday period had been blissfully pricing in omicron as omi-gone. Given it hasn’t really reached Asia yet, which is mostly vaccinated with traditional vaccines that don’t appear to work against omicron, I hope they are right. Such is the Western RNA-centric flat earth universe the markets live in.
Anyway, the meltdown overnight is more about positioning than anything, because when you look at what the Fed members said in the FOMC minutes, it wasn’t really anything different than what we already knew. I wouldn’t write off the irresistible power of the buy-the-dippers turning things around once again before the end of the week, especially if the US Non-Farm Payrolls comes in under 400k tomorrow night. Markets have been inflation nervous all week as the reality of the Fed taper peeps over the horizon.
What the price action this week tells us all is what I’ve been saying for a while, the start of monetary normalisation will make price movements a lot more “honest” than the past 18 months. The “buy everything” trade powered by “buy the dip; any dip” is on its last legs. Those most pimped-up asset classes valuation wise are the most vulnerable to meaningful downside corrections. And yet another generation of young pups, (and some older ones), nurtured at the central bank pool of eternal QE-driven asset price appreciation life, will have to learn the meaning of the term “two-way price volatility.” It’s about time.
In other developments, both US and European PMIs took a hit last night, mostly down to omicron nerves and restrictions. If all goes to plan with omi-gone, they should rebound quickly. Other evidence of that was the explosion higher of official US Gasoline Inventories to 10.1 million barrels overnight. Still, December US ADP Employment exploded higher, adding 807k jobs versus 400k expected. That should see the US Non-Farm Payrolls revised higher for tomorrow, but the ADP data has been a shocking indicator for the headline number. A sub-400k number should ease the Fed taper nerves of this week, with a 500K plus number having the opposite result.
This morning, both Australian and Japan PMIs eased slightly but remained expansionary, suffering some omicron nerves, but certainly not enough to say the recoveries are in jeopardy. China’s Caixin Service PMI outperformed in fact, rising to 53.1, some good news in a week where good news is thin on the ground with China. The start of debt restructuring talks tomorrow to avoid Evergrande’s bond put-a-geddon this weekend will likely continue to weigh on China markets.
The tech sell-off in the US won’t help matters either, especially in Hong Kong.
European Construction PMIs and the UK Services PMI this afternoon are likely to have taken a hit from omicron and Christmas holidays. The US releases Initial Jobless Claims, Factory Orders, and the ISM Non-Manufacturing sub-indexes. But I think the most interesting data today will be from our friends in Turkey, thanks to my colleague in New York, Ed Moya, for pointing it out.
At 1930 SGT, Turkey releases Foreign Exchange Reserves for the week ending December 31st. Having engineered a temporary Ponzi scheme to support the currency by backstopping the value of retail savers lira deposits as long as savers don’t lose nerves and convert to hard currency, Turkey has been intervening heavily in FX markets as well. Reserves have fallen from USD 89 billion in mid-November to around USD 72.50 billion as of the 24th. By my reckoning, the lira has already given back around 35% of its engineered gains in the past week or so, if reserves show a big drop this evening, the Turkish lira vigilantes will be back out in force me thinks.
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