EDITOR NOTE: It’s clear that despite the bad economic data we’ve been receiving over the last few months, the broader market has been rallying as if it's priced-in all the grim news, indicating an environment that remains unknown and unknowable. In an insightful survey that BMO sent to clients, we see that a large majority of traders believe that the Fed’s market manipulation is what’s fueling the rally--not companies’ earnings necessarily, not the underlying economy, but the Fed’s proverbial printing press. How long might the effect of these interventions last, and what effect will it have on the dollar? In response to this uncertainty, the traders in the survey also revealed their moves in response to varying situations.
As BMO rates strategist Ian Lyngen writes in "Jay's Market, Just Trading in it", a core theme of trading has been "the remarkable resilience of the equity market despite a shuttered economy, historic job losses and civil unrest across the US."
So to get to the bottom of the question on every trader's mind - just who is behind this rally - BMO sent out a poll to its clients where the first question showed a clear consensus for the driver behind the move; "73% offered the Fed as the inspiration behind the S&P 500’s impressive rally", vastly more than those who cited labor market recovery/reopening optimism (6%) greater fiscal stimulus (5%), and progress on Covid-19 treatment (6%). And now that Powell owns this rally, he better not allow to reverse.
1. What is driving the swift recovery of equities?
a) Fed – 73%
b) Earnings Optimism – 0%
c) Labor market recovery – 6%
d) Further fiscal stimulus – 5%
e) Progress in treating/preventing Covid-19 – 6%
f) Other (please specify) – Reopening Optimism/ All of the Above/ Underinvestment
Less relevant to the market's ramp but just as interesting in terms of what markets expect for the Fed to unveil next in the central bank's creeping nationalization of capital markets, were responses to BMO's second special question - when, or even if the FOMC will roll out yield curve control - which were not nearly as clear cut with a wide variety of opinions. 3-6 months was the most common answer with 33%, which points to the September, November, or December meeting as the most probable venue for the introduction of the new policy tool. Within ‘3 months’ or ‘not this cycle’ both took a roughly equal share as the second most frequent reply, so as Lyngen notes, "clearly investors are split on whether YCC needs to be deployed rapidly, or not at all given the state of the economy and recovery. 6-9 months and 9+ months both rounded out the replies with 14% and 12%, respectively."
2. When will the Fed announce yield curve control?
a) Within 3 months – 21%
b) 3-6 months – 33%
c) 6-9 months – 14%
d) 9+ months – 12%
e) Not this cycle – 20%
Finally, an interesting snapshot on how investors respond to data is BMO's question how respondents will react to tomorrow's jobs report: In the event of a disappointment and a Treasury market rally, the clearest takeaway was a reluctance to take profits – only 25% would sell versus a 37% average and the lowest read since October 2019. Meanwhile 11% would join the rally and buy and 64% would do nothing compared to respective averages of 7% and 56%. The other meaningful takeaway was a positive skew on the belly of the curve as 36% thought the next 15 bp in 5-year yields will be higher; well below the 45% average and matching last month’s figure as the lowest since November 2019.
Originally posted on ZeroHedge