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How Short rates affect EURUSDThis excerpt is part of a larger blog post where I'll delve into my 2024 trading strategy and explain the rationale behind my trades. For those new to trading, early career decisions play a pivotal role in shaping one's trading trajectory, significantly impacting both profitability and mental ability to continue trading over the years. The two choices are clear: 1. Follow trade signals devoid of explanations, endorsed by traders concealing their identity, background and their P&L data. These traders may excel at marketing on social channels but might be grappling with substantial losses or in most cases lack proof of making consistent profitable trades in their short careers. They often will have conflict of interest arrangements with brokers, encouraging frequent trading leading to unnecessary losses. OR 2. Grasp the art of consistently making trades by understanding fundamental drivers. This involves being discerning about trades based on volatility parameters that have a higher probability of profit. If option 1 resonates with you, then it's time to redirect your attention to the myriad of 'Educators' who, despite lacking real trading experience, are eager to part you from your hard-earned cash. Always demand a verified P&L link (not screen shots) and observe their response. For those opting for option 2 , this marks the commencement of a series of blog posts interpreting endogenous and exogenous factors that influence forex pairs and how to capitalize on them. Background. When I formulate a trade idea, my first task is to gauge the purchasing power of a currency. This involves analyzing an extensive set of historical indicators like PMIs, NMIs, CC, building permits, etc. The resulting scorecard, based on historical values, aids in determining whether a currency is gaining or losing purchasing power. Comparing this exercise across other G10FX currencies provides the foundation for my trade. I can identify which currency has a short bias, which has a long bias, and the specific pair I am confident in shorting or going long. All this occurs before delving into volatility parameters (which we'll explore in a future post). When a future data is released, the movement in the pair is either confirming or contradicting the trade idea, the trade idea is still valid but maybe it doesn't have as much margin of safety as first thought. In this blog, I'll delve into one key statistical driver— the short-term interest rate differentials. While crucial, it's not the sole determinant of EURUSD movement. Last month, Jay Powell's Fed hinted at considering three rate cuts in 2024. This decision stems from the U.S. economy's accelerated path to disinflation. Powell, having waited for inflation since 2018 and taking no action in 2021 & 2022, aims to prevent the economy from slipping into deflation. Simply put, disinflation benefits equities and the economy, but deflation is detrimental to jobs and the stock market. Meanwhile, the ECB has adopted a cautious "wait and see" approach, despite its economy teetering on the brink of deflation and a slowing trajectory that may raise concerns later on. The ECB is keen to avoid replicating the error made by Jean-Claude Trichet, who acted hastily in 2012, leading to the collapse of several Greek and Italian banks and triggering a 14-year period of Euro instability. Notably, the ECB operates under a single mandate, distinguishing itself from the Federal Reserve, which manages two mandates. Currently, the ECB has communicated no intention to engage in rate cuts, opting to maintain higher rates until the data supports such a shift, particularly if inflation consistently remains below the 2% threshold. Given the current scenario, we work with the available information. According to the latest dot plots, the Federal Reserve anticipates three rate cuts, while market sentiment hints at eight cuts in 2024, not all of which have been fully factored in yet. Comparing the current interest rates: Federal Reserve: Current: 5.500% Priced in (10-year): 3.8% (1.7%) European Central Bank: Current: 4.500% Priced in (10-year): 2% (2.5%) The existing interest rate differential is expected to continue narrowing towards 0.8%, propelling the EURUSD higher to around 1.20-1.23 by year-end as new data confirms the U.S. trajectory toward disinflation. While this ascent may not follow a linear path, periodic reevaluation of the trade (around 1.15-1.17) will be necessary as quarterly data is released. There's potential for an accelerated upward movement on EURUSD, reminiscent of the 2017-2018 surge from 1.05 to 1.25. With the trade idea now taking shape, the focus shifts to volatility parameters. These factors will dictate trade size, determine permissible drawdown levels before exiting, and guide decisions regarding necessary hedges. Details on these considerations will be explored in future posts. For full transparency, my P&L (+700%) is readily available on my profile page, along with information on my community. Wishing fellow traders a successful hunt and a happy new year.
TVC:DE02YLong
by Macro-Traders-Strategies
1
déjà vuCircle is the most perfect of shapes. It optimizes its area perfectly. An architectural marvel with no point of failure. And it is unique. All circles are similar to each other. Some small, other large. In the end identical. Cycle is the Hellenic word of Circle. I purposefully call it "Hellenic" instead of "Greek" Market cycles are just that, cycles/circles. All of them are identical clones of the original. Price is after all, nothing more than perfect fractals, the equation of which is, and will forever be, unknown to us. FED is the all-powerful entity that gives birth and death to bull markets. Its only weapon is yield rates. Don't go against the FED. Yield rates up = Bull Equity Market Yield rates down = Bear Equity Market Many think this is the other way around, that yield rates kill equity markets. Why do rate hikes help equities though? Because Bonds. Bonds suffer during periods of rate hikes. And they soar when yield rates remain constant or fall. The usual investment strategy of equities+bonds is creating a rapid shift in flow as we speak. For a year, massive amounts of wealth was withdrawn from bonds, and invested into equities. This trend is about to shift rapidly. And the speed of such a shift is extreme. While short-term rates are very fast moving, long-term yields represent a heavy market, and thus are more important in our analysis. I will ignore the FEDFUNDS rate because it represents a fraction of the weight of US10Y. Long-term yields didn't change much in 2007, but the crash was devastating. In 2018 the same happened, but faster in US10Y. The slope was much higher than in 2007. This resulted in a literal black swan event. The consequences of the 2020 crash are still unknown. Moving to today, we witness an unparalleled change in yield rates. This has resulted in massive bond crashes as we have shown before, and will most certainly lead to incalculable effects in the equity market. History has shown that the stronger the rate change, the harder the crash. This makes sense. The higher yield rates go, the greater the incentive to invest in bonds. Be aware, the market is waiting for the FED to trigger the crash. Make sure to pick the correct side when the cycle ends again. Tread lightly, for this is hallowed ground. -Father Grigori
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TVC:US10Y
by akikostas
6
THREE WORDS THAT YOU SHOULD KNOW — TNX GOES NUTS!Bank of America says the recession and credit crunch could lead to large corporate defaults. Credit strategists at Bank of America note that the fallout from the recession and credit crunch could see $1 trillion in corporate debt eventually become insolvent. This is largely due to the fact that banks have already begun to refuse lending conditions after the collapse of Silicon Valley Bank. US debt growth has also slowed in recent years, and a "full blown" recession has yet to be officially declared. If a full-blown recession does not occur in the next year or two, the restart of the credit cycle will be delayed. For now, analysts still predict that a moderate/short recession is more likely than a full blown recession. Markets are increasingly nervous about the prospect of a future downturn, with the New York Fed's Recession Probability Index projecting appr. 70 percent chance of a recession hitting by April 2024. The risk comes from the Fed's aggressive 21-fold increase in interest rates over the past 15 months to tame inflation. The US Federal Reserve, having fired a lot of "HIKE RATE" ammos over the past two years. And certainly has fulfilled its goals. In fact, in the second quarter of 2023, the rolling 12-month growth rate of the Consumer Price Index (April value = 4.9%) was below the Core CPI (April value = 5.5%). In human words that means prices of food and energy are deflating year-over-year. To some extent, the risk is also heightened by the recent banking turmoil, as lenders suffer losses on their "HELD-TO-MATURITY" (and in fact "READY-TO-SELL") portfolios of long-term corporate bonds and US Government bonds, as well as in due to a sharp outflow of deposits. The technical picture in TVC:TNX says the key trend is still strong, thanks to tailwinds from the first quarter of 2022 and support of Weekly SMA(52). The second half of 2023 is off to an interesting start. High quality "AAA" 10-year Bond' yield is back to pain levels corresponding to the collapse of the FTX cryptocurrency exchange last fall, as well as the collapse of regional and cryptocurrency banks as early as this spring, 2023 (like SVB, FRC and others). At the same time, real (that is, minus inflation) rates are now certainly much higher, against each of those two marks, as inflation is down.
TVC:US10Y
by Pandorra
2
The Ripple Effect: How Interest Rates Influence the Stock MarketIntroduction Brief Overview In the complex tapestry of the global economy, few factors play a more pivotal role than interest rates. At its core, an interest rate is the cost of borrowing money, a fundamental element that influences economic activity. Governed largely by a nation's central bank, these rates are a powerful tool, used to control economic growth, manage inflation, and stabilize the currency. Whether you are a homeowner paying a mortgage, a student paying off loans, or a conglomerate investing in new ventures, interest rates touch every corner of economic life. They are the heartbeat of the financial world, dictating the rhythm of spending, saving, and investing across the globe. Thesis Statement This article delves into the intricate dance between interest rates and the stock market, a relationship that is both dynamic and profound. Interest rates don't just influence how much it costs to borrow money; they also have a domino effect on stock prices, corporate profits, and investor behavior. Our focus is on unraveling this complex interplay, shedding light on how fluctuations in interest rates can set in motion waves that ripple through the stock market. Importance For investors, particularly those engaged in swing trading, understanding the impact of interest rates is not just academic—it's a crucial aspect of strategic decision-making. Swing traders, who typically hold positions from a few days to several weeks, must be acutely aware of how interest rates can influence market trends and individual stock performances. A change in interest rates can alter the investment landscape overnight, creating risks and opportunities that must be navigated with skill and insight. In this context, a deep understanding of the interest rate-stock market relationship is not just beneficial; it's essential for successful trading. By grasping how interest rates influence market dynamics, swing traders can better anticipate market movements, make more informed decisions, and, ultimately, enhance their trading performance. Section 1: Understanding Interest Rates Definition and Function At its simplest, an interest rate can be understood as the price paid for the use of borrowed money. This rate, usually expressed as a percentage, is what borrowers pay lenders in addition to the principal amount borrowed. But beyond this basic definition, interest rates are a cornerstone of financial policy, serving multiple roles in the economy. They act as a regulatory tool for economic growth, influencing the level of spending and saving in an economy. When rates are low, they encourage borrowing and spending, injecting more money into the economy, thereby stimulating growth. Conversely, high interest rates tend to slow down economic activity by making borrowing more expensive, thus dampening spending and investment. In this way, interest rates are a key lever used by policymakers to maintain economic stability and target inflation levels. Determinants of Interest Rates The setting of interest rates is not arbitrary; it is influenced by a myriad of factors, primarily steered by a country's central bank. The most significant determinants include: 1. Inflation: One of the primary goals of setting interest rates is to control inflation. When inflation is high, central banks may increase interest rates to cool down the economy. This increase makes borrowing more costly and saving more attractive, which can reduce spending and bring down inflation. 2. Economic Growth: Interest rates are adjusted in response to the current state of the economy. In periods of economic downturn or recession, lowering interest rates can stimulate borrowing and investment, providing a boost to economic activity. In contrast, in times of robust economic growth, higher interest rates can help temper expansion and prevent the economy from overheating. 3. Monetary Policy: Central banks, such as the Federal Reserve in the United States, use monetary policy to manage economic stability. This policy includes setting the target interest rate, which influences overall financial conditions in the economy. The central bank's perception of economic conditions (like employment rates, GDP growth, and consumer spending) significantly influences its monetary policy decisions. 4. Global Economic Factors: In today's interconnected world, global economic conditions also play a role. For example, if major economies are experiencing growth or recession, it can influence interest rate decisions in other countries due to the global nature of trade and finance. Understanding these determinants is crucial for investors and traders, as changes in interest rates can have widespread effects on the financial markets, including the stock market. This understanding forms the foundation for appreciating the nuanced ways in which interest rates can influence stock prices and investment strategies, particularly in the realm of swing trading. Section 2: Interest Rates and the Stock Market Direct Impact Interest rates wield a direct and significant influence on stock prices. This impact primarily revolves around the cost of capital and corporate earnings. Lower interest rates make borrowing cheaper for companies, enabling them to invest in growth, expand operations, or refinance existing debt at more favorable terms. This often leads to increased corporate earnings and, by extension, higher stock prices. Conversely, when interest rates rise, borrowing costs increase, potentially leading to reduced profits and lower stock valuations. Furthermore, interest rates also affect the discount rate used in valuation models. When rates are low, future cash flows are discounted at a lower rate, increasing the present value of stocks. Higher interest rates mean a higher discount rate, which can reduce the present value and, consequently, stock prices. Investor Psychology The psychological aspect of investing plays a critical role in how interest rates affect the stock market. Lower interest rates often create an environment of economic optimism, encouraging risk-taking among investors. Stocks, being riskier assets, become more attractive in low-rate scenarios as investors seek higher returns, driving up demand and prices. On the flip side, rising interest rates can signal a tightening of monetary policy and potential economic slowdown. This can lead to increased risk aversion, prompting investors to shift their assets to safer havens like bonds or even cash. Such shifts in investor sentiment can cause stock markets to react negatively, leading to price declines. Sector-Specific Impacts Different sectors of the stock market can react quite differently to changes in interest rates. For instance: • Financial Sector: Banks and financial institutions often benefit from rising interest rates, as they can earn more from the spread between what they pay on deposits and what they earn from loans. • Real Estate Sector: This sector typically has a negative correlation with interest rates. Higher rates increase the cost of mortgages, which can dampen demand for real estate and negatively impact related stocks. • Technology Sector: Tech companies, particularly those with high growth potential but lower immediate profitability, can be sensitive to interest rate changes. Lower rates generally favor these companies by reducing their cost of capital and valuing their future earnings more favorably. • Consumer Discretionary Sector: Consumer spending habits can be influenced by interest rates. Lower rates might encourage more spending on non-essential goods and services, potentially benefiting this sector. Understanding these dynamics is essential for traders, especially those involved in swing trading, as it allows them to anticipate which sectors might be poised for growth or decline in response to interest rate changes. This sector-specific approach enables more informed and strategic investment decisions. Section 3: Historical Case Studies Past Trends To fully grasp the impact of interest rates on the stock market, it is insightful to turn to history. Several instances stand out where shifts in interest rates led to significant market movements: 1. The Early 2000s Dot-Com Bubble Burst: Following the burst of the dot-com bubble, the Federal Reserve lowered interest rates to historic lows to stimulate the economy. This action, coupled with other factors, led to a rapid recovery in the stock market, with the S&P 500 climbing significantly in the years that followed. 2. The 2008 Financial Crisis: In response to the 2008 financial crisis, central banks around the world slashed interest rates to near-zero levels. This move was aimed at encouraging investment and spending. Stock markets eventually responded positively after an initial period of high volatility, with indices like the Dow Jones Industrial Average rebounding strongly in the subsequent years. 3. The COVID-19 Pandemic Response in 2020: As a reaction to the economic fallout from the COVID-19 pandemic, central banks again cut interest rates. This action, combined with fiscal stimulus, led to a swift recovery in stock markets, with tech stocks, in particular, showing strong performance. Analysis of Outcomes Analyzing these historical cases reveals several key patterns and lessons: • Quick Response Leads to Quick Recovery: One consistent observation is that swift and decisive interest rate cuts by central banks have often led to rapid recoveries in the stock market. This suggests that proactive monetary policy is a crucial tool in mitigating economic downturns. • Sector-Specific Responses: Different sectors respond uniquely to interest rate changes. For example, tech stocks have historically performed well in low-interest environments due to their growth potential and reliance on cheap capital. • Long-Term Impacts: While lower interest rates typically lead to immediate stock market gains, the long-term impacts can be complex. Prolonged low-interest-rate environments can lead to asset bubbles and increased debt levels, posing risks to economic stability. • Investor Behavior: These historical instances underline the importance of investor psychology. Market sentiment can shift dramatically in response to interest rate changes, often resulting in short-term volatility before settling into a trend. These historical examples provide valuable insights for investors, particularly those engaged in swing trading. Understanding how the market has responded to interest rate changes in the past can help in formulating strategies that anticipate similar movements in the future, though it's important to remember that past performance is not always indicative of future results. Section 4: Interest Rates and Swing Trading Opportunities and Risks Swing traders, with their focus on short to medium-term market movements, can find both opportunities and risks in the fluctuations of interest rates. These changes can create significant price movements and trends in the stock market, which swing traders can capitalize on. Opportunities: • Sector Rotation: Interest rate changes often lead to shifts in sector performance. Swing traders can take advantage of this by rotating into sectors that are likely to benefit from the current interest rate environment. • Trend Identification: Interest rate trends can set the stage for medium-term trends in the stock market. Identifying and riding these trends can be a profitable strategy. • Volatility: Interest rate announcements and expectations can increase market volatility, creating price swings that traders can exploit. Risks: • Market Unpredictability: While interest rate changes can create trends, they can also lead to market uncertainty and unpredictable movements, especially around the time of major announcements. • Overreaction: Markets can sometimes overreact to interest rate news, leading to exaggerated moves that can reverse quickly. • Lag in Market Reaction: The full impact of interest rate changes on the economy and corporate earnings may take time to materialize, posing a risk for traders who act too quickly on interest rate news alone. Strategies Swing trading strategies in the context of changing interest rates might include: • Trading on Interest Rate Announcements: Swing traders can take positions just before interest rate announcements, betting on the market's reaction to the news. • Riding the Wave: After an interest rate change, traders can identify which sectors are likely to benefit and take positions accordingly. • Contrarian Strategies: In cases of overreaction, swing traders might adopt a contrarian approach, taking positions opposite to the market's initial movement. Mark Minervini’s Perspective Mark Minervini, a renowned stock trader, emphasizes the importance of understanding market context, which includes the impact of interest rates. Minervini's trading philosophy, based on specific patterns and technical analysis, also considers the broader economic environment. He suggests: • Focus on Quality Stocks: Even in fluctuating interest rate environments, Minervini advocates for focusing on high-quality stocks with strong fundamentals and growth potential. • Risk Management: In times of interest rate volatility, Minervini stresses the importance of stringent risk management strategies to protect against unforeseen market movements. • Adaptability: Minervini's approach is about adaptability - being able to switch strategies based on changing market conditions, including shifts in interest rates. By incorporating these insights and strategies, swing traders can better navigate the complexities of trading in varying interest rate environments, balancing the pursuit of opportunities with the management of risks. Conclusion Summary This article has explored the multifaceted relationship between interest rates and the stock market, highlighting its significance in the realm of investing and swing trading. We began by defining interest rates and their function in the economy, followed by an examination of the factors influencing their determination, such as inflation, economic growth, and monetary policy. We then delved into the direct impact of interest rates on stock prices, investor psychology, and the varying responses of different market sectors. Historical case studies provided a practical perspective, showcasing how shifts in interest rates have historically affected the stock market. In the realm of swing trading, we discussed the opportunities and risks presented by fluctuating interest rates and outlined strategies to navigate these changes, incorporating insights from Mark Minervini's trading philosophy. Finally, we analyzed the current interest rate environment and offered educated guesses on future trends and potential market reactions. Final Thoughts Understanding the dynamics between interest rates and stock market behavior is not just about recognizing patterns; it's about comprehending a fundamental aspect of financial markets. For investors and swing traders, this knowledge is crucial. It enables them to adapt their strategies, mitigate risks, and seize opportunities in a landscape that is constantly shaped by monetary policy decisions. Call to Action As we navigate through evolving economic conditions, the importance of staying informed cannot be overstated. I encourage readers to continuously educate themselves about current economic trends, particularly interest rate movements. Integrating this understanding into your investment strategy can provide a significant edge in making informed, strategic decisions in the stock market. Remember, in the world of trading, knowledge is not just power—it's profit.
TVC:US10YEducation
by JS_TechTrading
US 10Y TREASURY: testing 4.0%Cooling inflation data in the US were the ones which were supporting optimism with market participants, indicating a good time to start purchasing the US bonds. The PCE data were published on Friday, revealing that the index was increased by 0.1% in November. The PCE is one of the favorite Fed's inflation gauges, which indicated to markets that the Fed might start pivoting during Q1, as per market expectations since the beginning of December. For the markets, it was a clear entrance point, where 10Y Treasury yields reached lowest weekly level at 3.83%, while yields finished the week around 3.9%. At this moment, the market is actually testing the 4.0% support line for the 10Y Treasury bonds. It was more than evident on charts that the reversal point in the bond market started in November this year, while current 4.0% might be seen as a short term stop for yields. There is no question about where the yields will go in the future, however, the market is currently pricing 4.6% anticipated interest rates at the end of the next year. Charts are showing that there is an open path for 3.6% level, however, this would be the case for the year ahead. During the last week of December, it should not be expected to make any significant moves toward either side. The yields will continue to oscillate around the 4.0% level.
TVC:US10Y
by XBTFX
US20Y Analysis. I am bearish...Hello Everyone i want share my idea about US economic indicator. US economic is very strong what we hear but when i am looking that that price action tell me they are falling. This picture is simple, if my technical analysis will work here we have some strong RSI divergence, if indicator will drop below 50 LVL we will see some little trend change at lower timeframe but, if it will continue fall then we will see dollar fall too. Price were 3 times in overbuy, first and second time it fall but not too much and third time we have more clear divergences. For my prediction i need close this month below of last month low and give me new low-high. then i will try short Dollar index. for that it need few weeks to see we are right or not but at the moment i think i am right. BE PATIENT!!!
TVC:US20YShort
by elmakacho
2
Business Cycle Rotation Part 4In the first three installments we described an exercise utilizing the long term momentum in asset classes, the relationship between those classes and the Organization for Economic Co-operation and Development (OECD) Composite Leading Indicator (CLI) for the United States, in order to anticipate the business cycle and markets. Those posts are linked below. Since October when this series was mostly written, several markets have made promising changes in their momentum states and chart patterns. But, this is a teaching exercise so we will mostly work with the data available at the end of September 2023 and mostly (aside from rates) ignore the dramatic changes of last few weeks. We begin by assessing the change between November 2022 and October 2023. Ideally we should measure at the same point each year. When I was actively managing money this was an exercise I updated in early January so that I could include it in my yearend recap and provide forward guidance to my team. But, given the time perspective involved, slight differences built over a month or two typically make little difference. Interestingly this year may be the exception. I have included a chart of the two and ten year Treasury yields (inverted). Note the three drives to a low pattern in twos, (a sign of waning supply/growing demand), the break of the downtrend (yet to be confirmed by a monthly close above) and the tentative turn into the bullish quadrant. I think of rates as the first mover in the cycle. To believe that the business cycle has turned virtuous I would like to see ten year rates make a solid top and begin to reverse at least some of the technical damage created by the break above the multi decade downtrend and the 3.25% pivot that had defined the bull market structure. I would also like to see a more definitive turn higher in twos. In October rates were oversold in terms of momentum and the structure from the 2020 low was completely intact Until I see solid signs of a monthly perspective yield top in the two year and ten year, it will be difficult for me to label this as the kind of high that would lead a change in the economic cycle. Note that the trendline break in the month of December has turned the shorter term 10 year Treasury (inverted) trend from down to neutral. Commodiites: Commodities have moved from the bull waning to strong decline sector. The weakness in commodities remains consistent with a business cycle that continues to weaken. Dollar: The Dollar remains in bull waning. It has benefited from global flight to quality, carry and the aggresiveness of our central bank verses other central banks. But, of the asset classes, the Dollars relationship to the business cycle is the least consistent. Equities: Domestic equities have been mired in the strong decline sector (in part two we discussed at length why equities were still plotted in this sector). In October we were still categorizing equities as lower due to the lack of a rally in most of the equal weight and broader indexes. That remains the case, but barely, with the equal weight moving slightly above the top of its range. In part 5 we will draw final conclusions and attempt to extrapolate them to 2024. And finally, many of the topics and techniques discussed in this post are part of the CMT Associations Chartered Market Technician’s curriculum. Good Trading: Stewart Taylor, CMT Chartered Market Technician Taylor Financial Communications Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
TVC:US10Y
by CMT_Association
1
US 10Y TREASURY: pricing rate cutsIt was final time for the Fed to align with the market. At the latest FOMC meeting, this was the case, considering that rhetoric about potential rate increases was not at all in the spotlight of Powell's speech, but clearly slowdown of inflation and that FOMC members are perceiving Fed`s rates at 4.6% as of the end of 2024. This was a clear signal for markets that rate cuts are coming during the course of the next year, with current anticipation that it could be already in March next year. Although 10Y US Treasury yields started the week around 4.28%, they swiftly reverted toward the downside and lowest weekly level at 3.9%. The market is currently testing the $4.0% level, which might impose some volatility in the week ahead around this level. Still, looking at the larger picture, the yields would certainly further test lower levels, currently eyeing 3.8%.
TVC:US10Y
by XBTFX