YIELDS are still in focus and could cause problems for the stock-markets.
Why is that so important?
First of all you have to know that there is a difference between capital market rates and the Federal Funds Rate. The Federal Funds Rate is an control mechanism to keep inflation, demand, supply and more economy related points balanced.
Capital markets refer to the places where savings and investments are moved between suppliers of capital and those who are in need of capital. The rate of the capital market depends on the current risk which is increasing with the inflation.
Example:
Let`s say you borrow money to a customer with a duration of 1 year. In this time-period you expect inflation to increase, means the money that you will earn with this deal will have less value than now.
As a compensation you claim a higher interest-rate in order to compensate the depreciation 👉 This is basically why YIELDS are currently rising! Additionally you claim a bonus for special risk as higher inflation could cause a payment default of your customer.
This shows that Central Banks have way less impact on capital market rates, hence it is way harder to predict when YIELDS stop rising.
Why could that be a problem for stocks? Inflation is good isn`t it?
Simply because rising interes-rates mean less demand in credits due to higher expenses 👉 Less investment 👉 Less consume
When you look at this context you could assume that we kinda stuck in a loop.
1️⃣ FED prints money and causes inflation 👉 Bad for dollar and good for stocks 2️⃣ Capital market rates rise due to inflation 👉 Good for dollar and bad for stocks
...and so on...
I hope this helps you to understand why the current market is so choppy.
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great chart - thanks for that; one aspect to consider though.. you’ve mentioned Fed is printing money driving inflation however that is not true; since covid there was not one single dollar printed the Fed - US Treasury debt have been funded thru sexurities issue which purchased by large US and NON US banks; Fed thru QE is not printing money but rather purchasing bonds thru a reserve swap -> no cash settlement
Trading2ez
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@themnahf, Yes thats true I try to keep things short. Generally I`ve meant to mention money-flood. ;-)
A fakeout is a "False breakout". Institutional traders, such as banks and hedge-fonds manipulate the market below or above a key-support or resistance-level in order to stop out positions.
They sell the market into a "high-liquid-zone" when there is not enough liquidity in the market.
Example:
Let`s say a Bank wants to buy SPX500-contracts but the majority of the market is buying aswell.
The bank has huge position-sizes to fill as they work wit ha lot of money. Whenever you want to buy, you need a seller. When there are not enough sellers they either keep the market in a range (consolidation) until they have collected enough contracts or they move the market into the area of stop-losses.
When stop-losses are getting hit, they can buy, as a stop-loss in a long-position is a market-sell-order.
So when you get stopped out, they instantly buy when you lose and the market suddenly moves up again. ;-)
one aspect to consider though.. you’ve mentioned Fed is printing money driving inflation however that is not true; since covid there was not one single dollar printed the Fed - US Treasury debt have been funded thru sexurities issue which purchased by large US and NON US banks; Fed thru QE is not printing money but rather purchasing bonds thru a reserve swap -> no cash settlement