In a typically quiet week as we go into the final furlong towards the festive period, there could be some fireworks in the markets tomorrow as the US FOMC announces the outcome of its 2 day meeting.
All eyes are on Bernanke and whether he sets in motion the so called tapering of the massive bond purchasing (some $85bn a month) that has been in play under various forms (QE1, 2 and 3 as they were dubbed)
It seems from a Bank of America survey that few fund managers expect the Fed to taper today, or indeed in the New Year with most seeing the first moves in March as we can see in the chart below.
Just 11% of fund managers are braced for a potential taper this week — 32% expect the move in January and 42% in March. Even so, tapering seems to be causing no alarm among managers as 71% expect a stronger economy.
Interestingly, and perhaps as potential fuel for a New Year rally in the event of no taper, cash levels remain high amongst fund managers as a record number of investors — the highest percentage since January 2002 — still think stocks expensive. Michael Hartnett, chief investment strategist at BofAM said that investors also positioning for a stronger U.S. dollar and as such is creating a crowded environment in 3 trades in particular – Short yen (the most since 2002), long S&P 500 and long U.S. high yield.
The table below is music to my ears however as commodities and energy are the most unloved sectors. Almost without fail the most unloved sectors, particularly ones where the stock constituents have been sold down to bruisingly low levels, are the top of the tree the following year. All it needs is a bit of momentum to start and then the underweight (not physically!!) fund managers scramble to adjust their weightings such is the madness of the benchmarking system. The shrewdies of course operate ahead of the crowd not with them.
We can see also that the survey respondents remain most excited about Japan, with a net 53% overweight the country’s stocks, the highest since May 2006 – and which was nearer a market peak than a bottom (surprise, surprise). A net 43% say they’re currently overweight European equities, the most preferred region for the fourth straight month. A net 10% are underweight emerging markets.
Among other assets, sentiment towards gold further deteriorated, with 16% saying the metal is overvalued, the biggest reading since early 2012. As regular readers will be very aware of, we believe that the consensus and the massively crowded short trade are wrong here and that they are going to get a serious toe toasting in 2014…
So, with few expectations of a move by Mr Bernanke and his band of merry men today, there is the potential to shock the markets in these reduced liquidity days leading upto Xmas. Volatility will rise into the announcement and so it could pay to put some spikey bids and offers in in gold and the S&P. A taper, ironically, will probably be good for gold as a lurch lower towards the years lows in June around $1180/oz will likely set off a crescendo of short covering and reversal rally.
A non taper announcement this eve and a spike in the gold price on this could, in contrast, be for short term selling, particularly if the CoT data due out Friday reveals a decline in the managed money net short position. That would set up a decline into the New Year and further pricing in of a spring taper and the typical 2 years of a bear market exhaustion.
Keep your powder dry!