As we enter the three-day symposium of the world’s most influential market movers, one attendee at the Jackson Hole Lodge will probably be overlooked: a stuffed bear. And with good reason.
A Bull might have been more appropriate. Since 1978 when the Kansas City Federal Reserve has hosted its policy symposium, the US stock market has risen 2265%. Like the stock market the symposium struggled in the early years, mainly because they could not attract headline grabbing speakers for a more agriculturally focused event. However, both took off in 1982 with the switch to monetary policy topics and the arrival of Chairman of the Federal Reserve Paul Volcker.
Volcker presided over both a resurgent economy and a 224% stock market rally and attended the symposium every year until just before the 1987 Crash. Is that where the irony ends? Probably not.
In 1987, Paul Volcker’s successor, the newly appointed Fed Chairman, Alan Greenspan did not attend the event on ‘Restructuring The Financial System’. Probably just as well as within 2 months, the markets did the speaking and restructuring for him with the now famous Black Monday Crash. Janet Yellen may not be so lucky with her speech on Financial Stability.
Such comparison between Jackson Hole meets may seem to add little except a bit of color. And yet the potential contrast between 2017’s symposium and next year’s could possibly not be greater. Central bankers may have cause to crack open the champagne this weekend. The global economy is still growing, inflation remains in check and stock markets continue to rise, shrugging off the occasional geopolitical threat (Global stock markets are 13.51% higher on average than the last Jackson Hole). But next year we suspect there will not be any bubbles. They would have popped.
For all the many fundamental, intermarket, technical and sentiment (FITS) reasons that underpin our approach to markets and contained in the series of articles entitled ‘Milestones in Mania, after enjoying nine years of the third largest stock bubble in US history, we very strongly believe that next year it will be lower. The lesson of monetary history from the 1920s nor 1980s does not appear to have been learnt. Central bankers cannot continue to tighten monetary policy in a period of disinflationary growth without overpriced stock markets facing the consequences.
In 1929 there was no equivalent to Jackson Hole, but, with markets in a similarly euphoric state it doesn’t take much guessing who would have stolen the headlines that Fall. Roger Babson with “Sooner or later a crash is coming and it may be terrific” or Irving Fisher’s “Stock prices have reached what looks like a permanently high plateau”. We doubt any speakers will be so bold about stock market levels this time but it is nevertheless worth noting what central bankers may say.The main speakers, or the ones the market will focus on most, are Fed Chair Yellen (1600GMT) and ECB President Draghi (1900GMT). Both central banks have told us not to expect any news.
The main speakers, or the ones the market will focus on most, are Fed Chair Yellen (1600GMT) and ECB President Draghi (1900GMT). Both central banks have told us not to expect any news. However Draghi spent much of the two weeks after Sintra, Portugal visit on June 27th trying to unravel the market’s apparently incorrect interpretation of an allegedly anodyne speech.If Janet Yellen typically keeps to script she is unlikely to dwell much on inflation or employment but focus more on balance sheet normalisation. Financial prudence and hence stability should obviously begin at home. You would think reference to balance sheet reduction tightening with an under-emphasis on the five months of lower than expected inflation would be hawkish and potentially prompt a rally in yields, USD and a stock market fall. But history suggests, if they do, that reaction is delayed.
If Janet Yellen typically keeps to script she is unlikely to dwell much on inflation or employment but focus more on balance sheet normalisation. Financial prudence and hence stability should obviously begin at home. You would think reference to balance sheet reduction tightening with an under-emphasis on the five months of lower than expected inflation would be hawkish and potentially prompt a rally in yields, USD and a stock market fall. But history suggests, if they do, that reaction is delayed.
The ECB has already indicated that Draghi will not be addressing policy, although he did so at Sintra (the European Jackson Hole), and EURUSD has rallied 5.5% since then. It is difficult not to see any policy statement addressing normalisation / tightening, so if it doesn’t make such a reference it would be bearish for EUR. Neverthless, in recent speeches, the mere absence of “not tightening” has bolstered the single currency. History suggests this inconsistency helps keep EURUSD within the range.
If neither the brief nor the officials indicate we should expect anything, why should there be any market reaction at all? For the simple reason, traders have expectations and either have or want positions regardless of Jackson Hole. Markets are a continuum. In this respect, Jackson Hole represents a discontinuum, effectively putting the market on hold. No news is news to the market and an opportunity for traders to continue doing what they were going to do anyway. But the reality is frequently somewhere in between.
Given our view that market is close to a reversal and a period of heightened volatility for all markets, the history of how markets have traded before during and after Jackson Hole meets is interesting. General averages disguise the different unique circumstances of each year.
But markets and their reaction are thankfully simpler than reality and can be distilled into 1) Continuation of a trend (even if sideways) on absolutely now news 2) Positive reaction for the Central Banker’s currency or stock market if the potentially negative issues are addressed constructively 3) Negative reaction for their respective currency or stock market if the potentially negative issues are not addressed adequately. Comparison of Jackson Hole price action before the significant market turns of 1987 and 2000 is potentially very instructive.
In each case, the SPX was hesitant or even depressed before the keynote speech, but promply rallied after for 48-72 hours after before turning back down.
This stock market rally is typified by Apple which also reverses after an initial ramp probably as the meetings rarely produce much of substance as reflected a continued range in the US 10 yields. Perhaps most striking and possibly inconsistent is Gold’s average reaction. The continued rally after the 48-72 hour euphoric reaction to the Fed Chair’s speech begs the scale of the subsequent stock market reversal.
The same threat is also posed by the Jackson Hole fractals for the individual Dollar pairs. EURUSD follows a similar path to 10 US yields by range trading but a fall in both GBPUSD and USDJPY again flags a possible risk aversion 48-72 hours after Janet Yellen speaks. This is corroborated by a larger decline in EURJPY, the archetypal ‘risk’ cross.
The market is not expecting much out of the Jackson Hole symposium and may well be right. But that will not necessarily stop it from doing what it normally does: a ramp and reversal. Whether this turns out to be a major turn remains to be seen. But one thing that may not be seen is the stuffed bear….replaced by a stuffed bull.
Read the original article on Matrix Trade. Register now at matrixtrade.com for more articles like this, and to see our range of premium subscription services. Copyright 2017. Follow Matrix Trade on Twitter.
This Article Was Originally From *This Site*
Powered by WPeMatico