Two weeks ago, I warned you that things were looking as bearish as 2008. Since then, the S&P 500 has been down around 7% and is now resting on the edge of major support.
UK bonds crashed so far that the Bank of England (BoE) took fright and started up the printing presses again even though they had planned to start quantitative tightening next week!
We are now in the twilight zone where central banks are raising rates while also printing money.
We are witnessing what happens when a market has been controlled for so long by the central banks that no one knows what the right price is. When people start selling, it can turn into a stampede.
Crashing government bond markets in first-world countries is a huge deal. You don’t ignore it.
Will their intervention be enough to stop the rot? From what I have read, the plan is to buy as many bonds as necessary until the middle of October. But what will happen after that?
The immense rise in the US dollar that I predicted months ago is going into overdrive now and is causing problems in other parts of the world.
Imagine that you are a company in an emerging economy that has borrowed millions of US dollars. Rates are rising, and the US dollar is strengthening. Will you be able to pay the loan back?
The Bank of England was backed into a corner as its bond market crashed. When will the Fed be backed into a corner and forced to change course from its current hawkish stance?
I think we will need to see stocks sell off another 10–20% before they back off as the BoE did.
If central banks are forced to save the markets by easing off on rate rises, it will mean inflation will be allowed to run at a higher rate than they would like.
That is building the case for gold.
Either they want to go all the way with a Volcker moment, which could see gold remain under pressure, or they will be like a deer in the headlights as markets crash and will back off before their goal of crushing inflation is achieved.
The S&P 500 is resting on the precipice, which is the low of the correction created in June. The BoE intervention caused a quick spike, but then the selling returned straight away.
I have been saying that US 10-year bond yields could spike higher if the 3.5% level didn’t hold. Their yield jumped straight to 4% over the past couple of weeks, and there are no signs that the selling is finished yet, although the BoE intervention could ease some pressure for now.
I hope you have been heeding my warnings over the past nine months and that you aren’t feeling stressed out by what is happening. The volatility can get pretty wild from here, so don’t get fooled into getting bullish at exactly the wrong moment.
There are some huge opportunities brewing, but we need to see a serious capitulation event first, as I have said for a long time.
That time is approaching and could potentially happen within the next month or so.
Regards,
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Murray Dawes,
Editor, Money Weekend
