Tuesday, February 3, 2015

EDM5 – A girl you could bring home to mom

EDM5 is not sexy, but more like the girl you could bring home to meet mom.  Right now though, she is in one of her moods.  It could go either way, but if that look in her eye is any clue, she is ready to strike in a direction for which few have prepared. 

On Tuesday, EDM5 settled at 99.625, the lowest level since January 14th and sits at the edge of further losses should it settle below 99.62.  A low of 99.615 was reached on Tuesday that too had not traded since before mid-January.  Until Tuesday, the contract ranged between 99.655 to .62 since January 20th. 

There is a confluence of bearish developments over the last weeks and I will leave you to view the chart to reference the candlestick names. 

I have a sense the contract could be trading lower by the pit session open tomorrow and force some of the patient ‘roll-up’ long position holders to the sideline.  Otherwise, that day still seems near if not overnight. 

Should EDM5 break lower, there is a good likelihood the contract will retrace to 99.54 without much trouble.  The trigger for such would likely be some new willingness to entertain a Fed policy rate move in either June or July. 

Fed Bullard asks for a drop of ‘patient’ language, giving the Fed greater leeway to adjust policy rates as soon as the June FOMC meeting (two days following the expiry of EDM5 Future).  The Fed can go one way or the other, but it seemingly cannot afford to straddle the gulf between adding and removing accommodation for much longer.  The market is becoming increasingly volatile and this will not cease until there is some imagined path for policy rates.

Caution is advised that you do not interpret too much into a notion of ‘policy path’ at this stage.  The Fed need not commit to a dedicated program of a particular magnitude.  It need not do any more than ready for a single move and make that advance.  Economic agents will work overtime adjusting programs, models and projections to divine pace, force and scope of likely policy path.  

They shall all have good reason for why their particular model is superior because it takes into consideration this or that aspect and as their individual confidence levels rise, so to shall their willingness to take on risk.  For the benefit from their confidence to show in greater economic performance and reduced volatility, none of the economic agents need to have correct projections.  Conversely, they might otherwise all have clear premonitions.   Instead, what is important for now is that economic agents move from a sense of unknowing to a greater confidence in the visibility of the future. 

The Fed knows this and they want to jump the chasm between the accommodation it is leaving behind and the ‘normalization’ they are desperate to provide.  There is more than a little talk that bonds have reached bubble territory despite some very smart traders arguing that U.S. Treasuries should be trading on top of German yields or at least much closer to those levels. 

Of course the extent by which the advancing Treasury prices are a result of foreign buyers attracted to any yield above their own, we can understand how fleeting those funds can be if domestic conditions prove lasting strength bringing with it latent inflationary pressures.

The Fed can check up the bubble process in Treasuries if there is one while at the same time delivering some level of needed visibility in the face of heightened uncertainty.  By doing so, it could unleash the power behind the income gains from jobs growth.  If it fails to move forward it could result in further risk shedding and a return to sub-trend growth.   

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