Fed day
Sept 22, 2021
–Fed announcement and economic projections, followed by press conference. In 2018, the Fed was both hiking and trimming the size of the balance sheet, a state of affairs that eventually resulted in a hard tumble in equities starting in October 2018 and going through the rest of the year. Now, the Fed’s actions have arguably helped push stocks to new highs with stretched valuations. Some think that Evergrande’s problems will keep the Fed from moving ahead with tapering, but remember, this taper is not shrinking the size of the Fed’s balance sheet, only slowing the growth. With respect to Evergrande, it’s worth noting that in 2008, from May to June EEM fell 80% from 51.50 to 19.19. Over that same approx time frame HYG fell 36%. In the brief Feb to March 2020 Covid plunge, EEM fell 33% and HYG 23%. In the current case, when EVERYONE already knows about Evergrande, from the June high EEM is down 10% and HYG around 1%. The market is looking past the problem, even though I think it will have future reverberations. The Fed should go ahead with taper plans now. By the way, in September of 2015 when the Fed delayed the first hike, EEM had traded from 44 to 31, one of the reasons the Fed waited for December to start. But EEM was still in the low 30’s when the Fed DID initiate the first hike in Dec 2015.
–Seller of about 30k EDZ1/EDH2 yesterday just looks like a roll out of Dec longs into March. There had been an exit seller of about 30k 3EV 9850 puts over the last couple of days at 5 to 5.5, but yesterday a buyer of 60k 3EV 9837.5p for 2.5 (appears new) settled 2.75 vs 9857.0. Ten year yield up 1.6 yesterday to 1.323%. 5/30 ended the day just under 103 bps.
