A look at Federal Reserve Quantitative Tightening Programme, its effect on the US Dollar and US Equi

A good week for the S&P500 after the strong reverse day on 3/5/18 which we have not looked back since. We however would like to emphasis that this recovery was on very low trading volume of just 60% of the two year average volume, even on a break of the triangle pattern which everyone have noticed.

We do not take Triangle breakouts on low volume as a convincing move and thus seek to see what could be the catalyst for the next test lower.

While most of the media attention has been on the Fed Interest Rate hiking policy, we have previously warned readers that more focus should be placed on the Quantitative Tightening (QT) Programme which has been in place since October 2017 with a scaled up cap every quarter to the amount of assets the Fed will rollover upon Treasury and Agency Securities upon maturity.

In increasing cap to the amount of assets the Fed can rollover would equate to the Fed reducing its balance sheet, and thus reducing total liquidity in the banking system. This is done so through the open markets trading desk at the New York Fed.

We decided to take a look if there is any correlation between periods of QT which falls on dates 15th and last business day of each month in which are dates for US Treasury Bills/Notes/Bonds maturity, effects on the Equity Market versus dates in which there is a prolong period of no QT activity. Issuance of new Treasury Debt are also on the mid and last business day of each month where by the US Treasury auction new debt.

A table below shows the debt maturity of the assets the Fed holds since the start of the year. We are using an 3/1/18 dated table to show readers of the dates where by QT is done and also look at the expected effects on the US Equity Benchmark S&P500.

An average of 30B of US Treasury Debt the Fed holds expire on a monthly basis. Using a cap of 12B for Treasury Debt for Jan-mar 2018 to a 18B tightening per month for Apr-Jun. This figure is expect to grow higher every quarter in 2018 as the rollover cap increases accordingly as per the 1st table of this post.

The average quantity for asset purchases equating to % of Fed Funds Rate is at the tune of 600B : 100bps.

Thus on top of the regular Fed Rate Hikes this year, we are looking at at additional 0.40% rate hike at the current pace of expected QT by the Fed Open Markets Operating Desk.

Next, we take a look at how the S&P500 reacts to such QT operations. The Chart below shows the S&P500, along side the blue arrows which are dates the Fed proceed with a more than 20B QT operation.

We are thus excited to see if are we able to use this QT operation as a method to time the market reversal as the S&P500 continues to trade within a range. We seek to sell the bounce by next Tuesday Asia time on global indices as in the past 3 months, all bounces are faded on QT dates, and bottoms are found on periods whereby there is prolong period of no QT.

Within the next two weeks, are are looking at a a 26B maturity on 15/5/18 and 28B Maturity on 31/5/18, which would be the largest one month maturity and thus QT period since the start of the QT Programme. We thus advice longs to take profit ahead of this period.

As below is a chart from the FRB of St Louis showing the total Fed Assets held on the balance sheet. We can expect this figure to to decrease in a faster manner and thus bring the S&P500 down with it as given the move it has done since 2009.

A chart showing the recent movement on the Fed Balance Sheet.

We have no doubt this will be the start of the mega USD Rally, and thus would have massive effects on Emerging Markets as we have proved to be correct in last week post.

We remain bearish on Global Equity Indices and call for this as a perfect opportunity to sell the bounces once again, as we seek to absorb all buyers at the 200MA and Feb18 lows for the Ultimate Crash of the Decade.

Giving you the confidence to sell the bounces. We will come back on this topic next week as a review after the 26B debt maturity and QT operation next Tuesday 15/5/18.

Before we end of this week post, as a Singaporean Team, we are proud that Singapore is holding the Kim-Trump Summit on 12/6/18.

Having seen much speculation on where would the summit be held and where would the two world leaders stay, we have a good proposal as below for the summit venue as we end off the week with a laugh.

We are very excited to see the NK-USA Events unfold in Singapore Peace Centre Mall which is home to many good food and good food*. :D

Good Luck Trading!

The Bad Bear

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