April 7, 2021

7:15 am

The Shanghai Composite appears to completed its Master Cycle on day 267.  The new Cycle has all the earmarks of a panic Cycle.  This is made even more probable should liquidity be curtailed.

ZeroHedge remarks, “One month after global markets underwent a brief hiccup after China’s top banking regulator said he’s “very worried” about risks emerging from bubbles in global financial markets, Beijing is now looking inward and as the FT and Bloomberg reported, China’s central bank has asked the nation’s major lenders – which are all at least partially state-owned which means it wasn’t ‘asked’ but rather ‘ordered’ – to “curtail loan growth for the rest of this year after a surge in the first two months stoked bubble risks.”

The report goes on to note that at a meeting with the People’s Bank of China on March 22, banks were told to keep new advances in 2021 at roughly the same level as last year. The directive targeted not only domestic lenders but also “some foreign banks” which were also urged to rein in additional lending through so-called window guidance after ramping up their balance sheets in 2020.”

 

NDX futures are also easing away from a lesser high, very similar to the Shanghai Index.  It appears that the Tech-heavy Shanghai and the NDX are tracking very closely and are influencing the US equities market.  The absence of liquidity in the Chinese market may have a knock-on effect in the US markets, regardless of the FOMC decisions.

ZeroHedge observes, “In its chart of the day, DB credit strategist Stuart Sparks writes that history teaches us that although investments in productive capacity can in principle raise potential growth and r* in such a way that the debt incurred to finance fiscal stimulus is paid down over time (r-g<0), it turns out that there is little evidence that it has ever been achieved in the past.

The chart below illustrates that a rising federal debt as a percentage of GDP has historically been associated with declines in estimates of r* – the need to save to service debt depresses potential growth.

As Sparks concludes, and this will probably get him kicked out of his favorite neighborhood club for confused Keynesians, “the broad point is that aggressive spending is necessary, but not sufficient. Spending must be designed to raise productive capacity, potential growth, and r*. Absent true investment, public spending can lower r*, passively tightening for a fixed monetary stance.”

 

SPX futures are flat, ostensibly awaiting the FOMC announcement.  However, as noted above, decisions being made elsewhere may have as much or more influence.  Note that the overnight volume on the US exchanges plummeted for the first time this year prior to the FOMC decisions being announced.

ZeroHedge reports, “Global stocks were stuck in a holding pattern on Wednesday at record high levels, with US equity futures unchanged from Tuesday’s close, as investors awaited details of the latest FOMC minutes. The 10-year Treasury yield reversed an earlier loss, while the dollar paused after a four-day slide.

While COVID case numbers rose in several parts of the world and geopolitical tensions between China and Taiwan and between Russia and Ukraine ensured it was by no means a fairytale, markets had a Goldilocks feel again with MSCI’s 50-country world index grinding out a sixth day of gains. Futures on the S&P 500 and Nasdaq 100 fluctuated after the underlying gauges retreated overnight as volume on U.S. exchanges dwindled below 10 billion shares for the first time this year.”

 

VIX futures briefly plummeted to 16.87, finally filling the open gap at 17.08 left in the VIX a year ago.  It quickly bounced bac above 18.00.  This explains the subdued action of the VIX for the past few days.  It also implies either a new Cycle beginning at the July 10, 2020 high, or an early termination of the Cycle beginning on August 11 (see the chart).

 

TNX bounced to 16.74 tis morning after testing the Cycle Top support at 16.41. This appears to launch the final probe toward its target at 19.71 which may be due in two weeks.

ZeroHedge remarks, “he late Everett Dirksen, a long-serving Minority Leader of the Republicans in the U.S. Senate, is famously quoted as saying a billion here, a billion there, and soon we’re talking real money. That was back in 1969. At the time, a billion dollars was about one-tenth of 1 percent of GDP.

What about today? 

During 2020, the federal government provided a total of $3.2 trillion of Covid relief, starting with a mere $8.3 billion, then adding $104 billion, then adding $2.2 trillion, and finishing off the year with another $900 billion.

We’re now three months into 2021, and the federal government has provided yet another $1.9 trillion in Covid relief; and, the Biden administration has just asked for $2 trillion for infrastructure.

To put these amounts into perspective: A trillion dollars is today about 4 percent of GDP.”

 

USD futures made a new low at 92.20 in the overnight session before moving back to the flat line.  There is about a week left in the Current Master Cycle and the liklihood of a final probe to the Cycle Top at 95.34 is high.

 

 

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