QE seems back in vogue, at least in England. Will the Fed take the cue?
Also, 15x forward P/E might provide a value anchor for the time being, presuming bonds remain stable.
What happened yesterday?
Yesterday evening, a fixed income trader in London told us at drinks that “the Bank of England saved the market today.” British hubris aside, he’s not far from the truth.
Global equities started the morning in the red like the 6 prior days. But while SPX dipped down to -1.5%, treasuries were miraculously showing a green candle.
The reason for that was to be found in Threadneedle Street in the City.
The Bank of England had been forced to step in the bond market with a mini-QE program, buying GBP 65bn of Gilts over the next two weeks.
BoE regarded the implosion of UK Treasuries as a “material risk to UK financial stability,” and just like that QE was back on the menu.
Half-way through the morning, equities finally turned their head, looked at the green candle in Treasuries and had a change of heart that led them to close 2% higher on the day.
Welcome back, QE. We missed you.
But isn’t this about the UK government spending plan?
No. That was the last straw that broke the camel’s back. Ok maybe more a tree trunk than a straw, but that’s besides the point.
UK Gilts had been falling 60% from the peak since early 2022 even without the help of Truss’ government.
Kwarteng’s debt issuance plan just nudged them down another 15% from peak. Good job, mate.
So is QE back for good?
It’s complicated, but in summary think about this as a slowdown of QT.
BoE showed us that Central Banks have very limited patience for bond volatility. To appreciate how bad this got for long bonds, look at the 40y Gilts below, which is down 75% in 2022.
That’s the kind of bond that pension funds and banks like to buy. And these institutions simply cannot be down 75% on a govie.
You can be sure that the Fed took notice and will be considering very carefully how to tune its QT program and its rate hiking plans.
All in all, this was a net positive for markets.
Commentary courtesy of WSB, click to open
In conclusion?
As we discussed yesterday, there are signs we are looking at a local trough for markets.
You have an oversold market, a mini-QE program and a bullish TLI. Nobody could blame you if you buy the dip here.
What does the TOGGLE Market Checklist have to say?
- The Good: Citi Economic Surprises turned positive this month. And P/E of ~15.9x is getting cheaper.
- The Bad: We’re watching that blip down in SPX Forward EPS very carefully.
- Upcoming: We’re looking to growth gauges at the start of October. Also, we’re keeping an eye on the sabre rattling from Russia.
Idea Spotlight: Alibaba (BABA)
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.