All Posts (10732)
Sort by
There is no question that QE3 or no QE3 is playing a big role in the day to day movements of currencies but while Europe's crisis has faded to the background it has not disappeared Spain is scheduled to sign a memorandum of understanding for its bank bailout plan at the end of this week and with some details still unknown, there could be some euro induced volatility for currencies towards the end of this week. ECB President Draghi said this morning that the question of burden sharing with senior bondholders is being discussed on the European level. Even Bernanke said there is a possibility that the situation in Europe could worsen. Given the troubles in Spain, it is no surprise that German investor confidence hit a 6 month low in July.
Kathy Lien
Managing Director
BK Asset Management
About 20 minutes into the Q&A session, Bernanke admitted that they have a range of possibilities for more easing including more QE, using the discount window and cutting the interest rate on excess reserves. Their challenge right now is figuring out whether the "loss of momentum in the economy is enduring." However as the evidence shows, there is "frustratingly slow" progress on joblessness and a modest risk of deflation. This means that while August is out, QE3 is still an option for September. When the dust settled, investors realized that nothing Bernanke said today removed the risk of additional stimulus and for the currency market this means there is no justification for a dollar rally. If anything, Bernanke's concerns about deflation should tell us that the central bank remains in easing mode. FOMC member Pianalto spoke after Bernanke testimony and she confirmed that the economy needs "highly accommodative monetary policy."
Bernanke's noncommittal comments on QE3 are consistent with the central bank's strategy of biding their time until there is unambiguous evidence that another round of asset purchases is necessary. Two more months of job growth less than 100k and another month of negative retail sales could do the trick.
In front of the Senate’s Banking Committee today, Bernanke laid out his assessment of the economy including one bright spot (housing), and its challenges (employment, consumer confidence, manufacturing, and The Fiscal Cliff).
Unfortunately for the QE3-heads (kind of like Dead-heads or Parrot-heads), Bernanke gave no indication that the board was ready to pull the trigger, and that they will continue to “keep their options open” as they have been saying for the last month now.
As morning turned to afternoon though, the tide began to change. Suddenly, everything that had lost ground at the start of the Bernanke testimony turned around. The reasoning for this sudden change of heart boils down to the Q&A session the Senate had with Mr. Bernanke. After various questions about the Libor scandal, Bernanke was unable to avoid questions about additional easing, and was prodded to elaborate on what additional methods the Fed might use to stimulate the economy. Although the Fed may pass on QE3 this time around, they could pursue different measures to try and spur growth including cutting interest rates on excess reserves, verbal intervention including talking about future plans regarding rates and their balance sheet, or even using the discount window for additional lending purposes. Bernanke was careful not to tip his hand though,
Every trader in the world should know that this coming Friday is options expiration. This is a time when the major stock indexes and the popular stocks can be very volatile. Often, the institutional traders will look to push stocks in the opposite direction of the bet that the small retail options trader has made. The institutional traders simply read the imbalances in the market and push stocks in the other direction. For example, if the small retail options traders has been buying puts on the S&P 500 Index and that becomes an obvious imbalance the large institutional traders will generally push the market the other way. When this happens the small retail options traders will usually find that their option is out of the money and will often expire worthless by the Friday expiration. The one simple rule is to not buy the near term expiring contract, always pay a little extra and buy a little time. Remember, if you are a retail options trader there is reason why the options are cheap.
The large institutional traders know that the small retail options trader will rarely exercise an option. Usually, the small retail options trader is going to play for a gain in the premium paid for the option. Premiums will fluctuate like a stock depending on supply and demand. The large institutional traders know this and have enough cash on hand this week to push a stock in their favor. This is why I call this the real shark week. Some leading stocks that are usually very volatile during the trading week leading into options expiration Friday are First Solar Inc (NASDAQ:FSLR), Netflix Inc (NASDAQ:NFLX), Green Mountain Coffee Roasters Inc (NASDAQ:GMCR), and Amazon.com, Inc (NASDAQ:AMZN) just to name a few.
Not all testimonies before the Senate and House are big market moving events but in this case, we are at a critical juncture in monetary policy and the market is split on whether additional action will be taken by the Fed. As a result, every word that Bernanke says and doesn't say could have major implications for the market and for this reason he will choose his words carefully.
Today's sell-off in the U.S. dollar and U.S. equities tell us that investors are positioning for slightly more dovish comments from Bernanke. Surprisingly weak retail sales numbers in the month of June reinforced the deteriorating conditions in the U.S. economy and hardened the case for QE3. However, outside of overtly signaling the possibility of more stimulus there's not much Bernanke can say or do that he hasn't already.
