Monetary Policy (management of money supply and interest rates)
United States

This time let's start with the monetary policy in the U.S. During this week, we have had several speeches of the Fed member as well as the release of the FOMC minutes (Federal Open Market Committee), which includes discussions of the Federal Reserve Board about financial and economic factors they consider in setting monetary policy. They are usually released 3 weeks after the Fed meeting where the committee decides about the level of interest rates and money supply as well as future movements and economic projections.

On Monday, Cleveland Fed President Loretta Mester said during the University of Maryland event that the current level of interest rates in the U.S. is appropriate for its economy and the central bank will monitor subsequent developments. She reiterated previous comments of Jerome Powell and other governors that the labor market is strong and inflation is gradually moving towards a 2% target. Recall that the Fed has cut interest rates three times by 0.25% this year to 1.50-1.75% target from 2.25-2.50%.

When asked about negative interest rates, Mester told the audience that in Europe they are working better than she anticipated but she is not supportive of using them in the U.S. in case of an economic downturn and prefer quantitative easing (massive scale asset purchases) as well as forward guidance (central bank communication about the economy and future course of monetary policy). I don't know how to understand these comments, but negative rates in the EU have actually brought a lot of harm, especially in the banking and pension systems which are on a brink of collapse. 

Also on Monday, the Fed Chairman Jerome Powell met with U.S. President Donald Trump and Treasury Secretary Steven Mnuchin at the White House residence at the Trump's request. It was the second meeting between the Fed Chairman and the U.S. President this year. They have also had two phone calls. These meetings, however, are not anything unique. In the past, former Fed leaders, Alan Greenspan, Ben Bernanke, and Janet Yellen met with presidents on a few occasions, especially during the times of financial distress. Donald Trump concluded the meeting in two tweets:

There was a rumor that the real reason for the meeting was the trade deal between China and the U.S. is falling apart. And on Wednesday, all of a sudden Reuters reported that phase one U.S.-China trade agreement may not be done this year. We have seen a lot of mixed comments around the trade war this week but I will come back to that later.

On Wednesday, in another speech, Federal Reserve Governor Lael Brainard said that before making any changes to the monetary policy she wants to see how the U.S. economy is performing after recent rate cuts. It is worth emphasizing that it usually takes 6-9 months until they start to work into the economy. The question is whether it is not too late, because economic slowdown is quite significant and there are also external forces that influence the U.S. economy like problems in China which have driven this business cycle.

Let's conclude this part by reviewing the FOMC Minutes from the 29-30 October meeting. In a nutshell, they emphasized that economic risks in the U.S. remain elevated, despite their decision to hold on with further rate cuts this year. In simple words, they are afraid that global economic slowdown and international trade will worsen and impact the U.S. economy, and rightly so. In my opinion, we are in a tail end of the economic cycle (after 125 months of expansion - longest in history) and the trade war between China and the U.S. accelerates this trend.

On that meeting, Kansas City Fed President Esther George and Boston’s Eric Rosengren voted against the rate cut once again. Fed members also discussed negative interest rates as a possible tool to fight a future crisis and concluded that it would be not attractive to use it in the United States, mainly because it may cause financial instability of the system.

It looks like the market agrees with the Fed, and it is currently pricing a 6.6% probability of the 0.25% rate HIKE in the next meeting (11 Dec 2019).


Monetary policy in the Eurozone was a little bit busier than in the U.S. as the market awaited the very first speech of new European Central Bank President, Christine Lagarde, as well as the ECB minutes of the last Mario Draghi's meeting (previous ECB president). In the meantime, some ECB governors' speeches also took place.

The first one came from the ECB chief economist Philippe Lane on Monday, who said that despite unprecedented monetary easing, the central bank still has needed tools and has not reached its monetary policy limit. He also added that they would depend on particular circumstances. In terms of the Eurozone economy, he emphasized that it will not fall into recession and he expects a recovery in a year or two.

It totally contrasts with Austrian European Central Bank official Robert Holzmann who in the beginning of November told Bloomberg TV in an interview that the ECB has actually reached its limit and asked for fiscal stimulus (government spending) to step in.

It is not sure, what tools exactly had in mind Mr. Lane but let's hope it was not about stocks purchases or further interest rates cuts. It will only worsen the financial condition of the European banking and as well as the pension systems. It will also increase misallocation of capital and the number of zombie companies (firms that are unable to cover debt servicing costs from current profits over an extended period). Most of them are unproductive. And not even talking about destroying further the price discovery or increasing financial instability in the entire system. You can also read about the adverse effects of negative interest rates in the article:

Moreover, low or negative rates harm savers. At the end of September, Bundesbank surveyed 220 commercial banks asking whether they are charging negative rates on the clients' deposits, two weeks after the ECB’s cut its rate from -0.4% to -0.5%. In response, 58% of German banks said that they imposed negative interest rates on the deposits of corporate clients and 23% are doing the same for retail customers.

In a subsequent speech on Wednesday, ECB Vice President Luis de Guindos said that the level of interest rates in the Eurozone has not reached the so-called reversal rate yet. The “reversal interest rate” is the rate at which accommodative monetary policy (lowering rates, increasing money supply) reverses its intended effect and becomes contractionary for the economy. In simple words makes more harm than good for the economy or the banking sector. 

Negative interest rates were first introduced in the eurozone in June 2014. As you can see in the chart below, credit growth has increased since that time. However...

source: ECB

... in the period March 2015 - January 2019 net income margin of the European Banking Sector has fallen 29% and earnings per share have dropped an average of 12.3%. It has been reflected in the share prices which have declined almost 40% since June 2014 until today.

If one would said that it was due to a broader slowdown, here is the performance of the European Banking Sector (white), S&P 500 Banking Sector (green) and EuroStoxx 50 Index (yellow) since the introduction of negative interest rates.

source: Holger Zschaepitz, twitter

No wonder then why there has been so much criticism about the ECB policy, which I summarized in this thread on Twitter:

In my opinion, the reversal rate has been reached and if the ECB will be brave enough to lower it further, then we may experience severe consequences for the entire system such as a collapse of the banking sector.
As an extra addition, I attached a chart showing the European Banking Sector share prices over the last four decades.

source: zero hedge

It certainly does not look like investors feel confident about the European Banking System.

Moving forward, the ECB released its minutes from the October’s governing council meeting, last one with the former president Mario Draghi and the first with the new head, Christine Lagarde. There was a broad consensus that the ECB will maintain its strong easing stance (negative rates and asset purchases which have started on Nov 1, at a pace of 20 billion euros per month) but some members finally raised concerns about negative consequences of such policies or the so-called side-effects, which were mentioned in the first paragraphs. As we know, the heads of the German, Dutch, French and Austrian central banks were against the asset purchases. Unfortunately, it is highly likely that the current policy will be continued.

To conclude this part, a quick summary of Christine Lagarde's Friday speech called "The future of the euro area economy" which had a place in Frankfurt, Germany. Surprisingly, there was not much about the European Central Bank monetary policy, but her words confirmed that she will continue Draghi's path. The former head of the International Monetary Fund (IMF) also said that they will monitor the side-effects of their policies and has urged fiscal policymakers to step in such as Mario Draghi has done many times before (chart below).

In 2011-2013 he was asking for "Fiscal Consolidation" which means reducing governments' deficits and debt. For the last several months, however, he has been calling for more government spending. The problem is, there is no fiscal space, even in Germany. See the link:

For clarity, "Supply-side economics is a macroeconomic theory arguing that economic growth can be most effectively created by lowering taxes and decreasing regulation."

Trade War Between the U.S. and China

Now it's time to have a look into our favorite topic, namely the trade dispute between the Middle Kingdom and the United States. As always, summary in chronological order:

1. On Monday just before the U.S. stock market open, Eunice Yoon, CNBC reporter tweeted that a Chinese government source told her about a pessimistic mood in China about a trade deal due to Trump's reluctance to roll back tariffs, as Beijing believed the U.S. had agreed to.

2. Subsequently, South China Morning Post wrote an article saying that Chinese observers see the size of U.S. agriculture products order as the main stumbling block in talks, pointing out that neither side mentioned ‘making progress’ or ‘reaching consensus’ after Saturday's call.

3. In the meantime, U.S. Department of Commerce extended Temporary Licence for rural firms doing business with Huawei, the Chinese telecommunication giant.

4. President Trump said on Tuesday that China “is going to have to make a deal that I like. If they don’t, that’s it.” and added that he is very happy with China right now. Most importantly, he also said that he will raise the tariffs even higher if they don't make a deal.

5. On the same day, Vice President Mike Pence said that it would be difficult to sign a deal with China if Beijing uses violence against demonstrations in Hong Kong.

6. In the meantime, the U.S. Senate unanimously passed the Hong Kong rights bill on Tuesday. Legislation explainer in the link below:

7. Then Bloomberg reported that a deal which fell apart in May is now being used as the benchmark to decide how much tariffs should be rolled back in a 'phase one' deal.

8. On Wednesday, South China Morning Post noted that Chinese officials and state-run media were silent amid Donald Trump's threats.

9. Also on Wednesday, US Secretary of Commerce Wilbur Ross said that he is optimistic they can get something done on China and there is a hope to get a deal done which is still a work in progress.

10. Later on, Reuters reported some different U.S. trade experts comments saying that to achieve the $40-50 billion in annual Chinese purchases of U.S. farm goods, Trump would likely have to eliminate all tariffs put in place since the trade war started in 2018 and that a ‘phase one’ trade deal could now be pushed into next year.

11. In response to tariffs threat by Donald Trump, Xu Xijin, Global Times, Chinese daily tabloid editor tweeted that Few Chinese believe in reaching a deal soon. 
"The Global Times is not the official media outlet of the Chinese Communist Party - the People's Daily is - but Hu has described his role here as giving voice to what Beijing officials wish they could say in public." Reuters

12. Then Kayla Tausche, CNBC reporter cited four sources 'close to talks' that the deal is in trouble. 

13. During the day, Trump said that so far China has not made sufficient concessions, making him reluctant to strike a deal, also saying that he is looking at exempting Apple from tariffs.

There were so many negative developments in the first part of the week. Is this a real reason why the Fed Chairman Jerome Powell was requested to meet with Donald Trump on Monday morning?

14. At the same time, Reuters reported that "The U.S. House of Representatives passed legislation on Wednesday intended to support human rights in Hong Kong by requiring regular reviews of the city’s special financial status, amid China’s crackdown on a pro-democracy protest movement in the vital financial center." Donald Trump is expected to sign the legislation.

15. During Wednesday night, Bloomberg reported that China’s chief trade negotiator said at Wednesday's dinner that he was “cautiously optimistic” about reaching a phase one deal

He also said that he was “confused” about the U.S. demands, but was confident the first phase of an agreement could be completed.

16. In the early Thursday morning, the Chinese Commerce Ministry said that they are striving to reach a 'Phase one' deal.

17. In response to the Hong Kong bill, Senior Chinese Diplomat Wang Yi said that "China Resolutely Opposes U.S. Lawmakers Passing Hong Kong Human Rights Bill" and they will never allow anyone to destroy Hong Kong's prosperity and stability.

18. After that, the Wall Street Journal reported that China invited U.S. trade negotiators for further talks during the last week's call.

19. Meanwhile, House Speaker Nancy Pelosi sings Hong Kong Bill and sent it to Donald Trump to become a law, despite China retaliation warnings.

20. After the stock market trading session begun, South China Morning Post posted an article saying that if an agreement will not be reached before Dec 15, then tariffs scheduled on that day will be probably delayed. The reason for that is they are on the doorstep of a 'phase one' deal. 

Two hours later they also reported that the Hong Kong Human Rights and Democracy Act could become another barrier in reaching a deal and Beijing is closely watching Trump's next move. China sources also say they could 'fight and talk'

Here is the S&P 500 index summarizing late Wednesday and Thursday developments:

source: zero hedge

21. On Friday, Myron Brilliant, executive vice president and head of international affairs at the U.S. Chamber of Commerce said that the U.S. and China may not be able to strike a 'phase one' deal before mid-December (next tariff deadline). He also said that China wants the elimination of tariffs as well as the American business community, however, after 'phase one' deal will be reached not all tariffs will be withdrawn.

22. Finally, after being silent for a long time, Chinese President Xi Jinping has spoken, saying that Beijing wants to work out an interim or ‘phase one’ deal with mutual respect and equality and works not to have a trade war but they are not afraid to retaliate if needed.

23. U.S. President Donald Trump has commented on Xi's words saying that they are "potentially very close" to reach a deal and he didn't like the word "equality" adding that it can't be an even deal.

Trump also told Fox television: "thousands of people would have been killed in Hong Kong”
“If it weren’t for me, Hong Kong would have been obliterated in 14 minutes,"

He was also asked if he is going to sign a bill supporting the Hong Kong protesters, Trump responded that “We have to stand with Hong Kong, but I’m also standing with President Xi.”.

24. Shortly after that, Xu Xijin responded in a tweet:

25. Last information about the ongoing dispute came from Edward Lawrence, Fox Business and Fox News correspondent say that one of the Senior WH officials said that mid-Dec tariffs are still scheduled to go into effect.

Below you can see an interesting trade war timeline concluding the most important developments. 

source: Bloomberg

My opinion about a 'phase one' deal has not changed, and my answer to that question is included below.

To conclude the topic let me refer to an interesting opinion being made by Anthony Cheung, Head of Market Analysis and Sam North, Senior Associate, and Trader at Amplify Trading in London. In a nutshell, what's the point to sign a deal immediately if you are Donald Trump... Find out more here (4:30):

I also fully recommend you to watch their morning briefings every trading day.

Stock Market

My perspective for the S&P 500 has not changed. Let's recall a quote from the last week report:
"I think it is a time for a negative week for U.S. stocks. Here is why:"

Indeed, the S&P 500 has recorded a negative week but only by -0.32%, still driven by the Fed liquidity and Trade War headlines. 

Yellow candlestick on the chart means a negative day, blue positive. Interestingly, market has slightly declined in parallel with the Fed balance sheet:

Why it is important? Since early September Fed's balance sheet has increased by $286 billion to $4.048 trillion (currently $4.030 trillion). This increase had a huge effect on the stock market, as it is shown on the black chart above where the S&P 500 increased more than 7%. During the previous Quantitative Easing (asset purchases) programs (QE1, QE2, QE3) market also substantially increased. Although now the Fed is buying only short term U.S. bonds, those liquidity injections boost the bond market and make it easier to borrow cash by corporates which spend it on share repurchases increasing demand for stocks and inflating earnings per share (fewer stocks in circulation translate to higher earnings per share). Furthermore, treasuries bought by the Fed lower their returns making stocks more attractive

At this point, it is important to note that the biggest buyers since the last bear market low have been corporates (of course those listed in the U.S.) via share repurchases (buybacks).

Chart shows the cumulative buying/selling of U.S. stocks as % of market capitalization.

I would like to note that global equities are highly correlated to U.S. stocks which now account for more than 55% share of the global stock market (MSCI AC World index - approximately 85% of the free float-adjusted market capitalization in 23 developed and 26 emerging markets) and more than 60% in MSCI World Index (approximately 85% of the market capitalization in 23 developed markets, both showed on the left part of the chart.

On the right part, we can see valuations (if they still matter), or Shiller's Price to Earnings (P/E) which simply is a 10 years average Price to Earnings ratio adjusted for inflation. You can see how much global stocks (black line) are underpriced in compare to the United States (gray line) and it is after accounting for massive share repurchases in the U.S. which as you know inflates Earnings Per Share used in Price to Earnings ratio, thus should decrease the ratio.

Coming back to the S&P 500 index, nothing has changed since the last week and the market needs a trigger to either go up further or sell-off. I rather opt for the latter having in mind arguments from the previous report.

In addition to the last week's arguments, it is important to note that the number of S&P 500 put options expiring in March 2020 is the highest for four years, according to Trade Alert. It may mean that the number of investors hedging their long positions and betting on the market drop is the highest since that time. A put option is a financial instrument giving a right but not the obligation to sell assets on agreed price in a future date. Put options increase in value when the market falls, among others.

It has been confirmed by some market strategist saying that the Volatility Index (VIX) is near 2019 lows and the S&P 500 close to the all-time highs. They are using hedge either via call options (bet on a price increase) on VIX (or fear index) or put options on the SPDR S&P 500 ETF TRUST (ETF stands for Exchange Traded Fund) and iShares Russell 2000 ETF, which tracks the performance of small-capitalization stocks in the U.S. More in the article:
On the chart below, you can see the VIX.

Will the pattern from the blue rectangles repeat? If yes, then the S&P 500 also experience some drop.

Another argument may be that the market is losing patience about the trade war. Chart below shows market's probability of reaching a deal which has been falling since a couple of weeks.

source: zero hedge

And if something may trigger the market to sell, it will likely be the trade war.

On the other side, a rollback of tariffs or a deal announcement could boost the positive sentiment even further.

Looking at the stock market using the bond market perspective, an interesting point has been made by Northman Trader or Sven Henrich about the yield curve between 10-year and 3-month U.S. bond yields. In normal economic conditions, a difference between 10-year and 3-month bond yields should be positive, as longer-term bond yields bear more risk, so the interest on these bonds should be higher. If the investors perceive that the economy will slow significantly or will fall into recession in the near future, they start to buy longer-term bonds (10 years in this case) to protect their portfolios, so yields of these bonds fall significantly. On the other hand, there is less demand for short term bonds – investor fear of an upcoming economic downturn drives short term yields higher. If long term yields drop below the shorter-term bond yields (e.g. 3 months) then the yield curve inverts (the difference is negative), which is showed in the purple rectangle on the chart.

The top part of the chart shows the yield curve between 10 years and 3 months U.S. bond yields, and bottom part of the S&P 500 index over the last 25 years. As you can see in the yellow rectangles, the yield curve first inverted for a few months and then uninverted, subsequently the S&P 500 has been either falling (2000-2001) or has started to fall a few months later (2007-2008). Will this happen again?

source: Board of Governors, St Louis Fed (yields, black line & recession, rectangles). Shiller (S&P 500), red line

Here is also the chart starting from 1945 showing a similar pattern.


Bitcoin has dropped 15% over the week as China announced that it would take action against entities involved in trading cryptocurrencies, especially illegally operating crypto exchanges, we can read in a statement released on Nov. 21 by the People's Bank of China (PBoC), Chinese central bank.

PBoC will get rid of every exchange immediately after their discovery.

Recalling last week's scenarios for Bitcoin (chart above), it is clearly seen that the second one is currently in play.

If the channel breaks again, the BTC may fall as much as to $6000 (red rectangle), levels not seen since the beginning of the year.


Gold price, as well as its RSI, have formed declining wedges (red lines). As you can see 200-day moving average is currently at $1400.

As I noted in the first report, I see gold drop to around $1400 and it may be a good entry if the economic slowdown and central banks' easing continues. From a technical perspective, I see a possibility to enter when the RSI falls below 30 and coincides with the gold price being close or touching a 200-day moving average or breaking the wedge to the upside.


Greenback just bounced from its 200-day moving average and continues to trade in his multiple months' channel (red lines)

Considering the current stance of monetary policy around the world, I think that the dollar will continue to grind higher in this channel because the U.S. economy will be still the most resilient around the world.


Crude oil is forming an interesting pattern, crossing red lines in either way may accelerate the move further, in my opinion.

GLOBAL ECONOMY (and others)

1. Citi US Economic Surprise Index has again fallen below 0. It means that most of the actual U.S. data were worse than expected.

For example (as below):
Economists' forecast for industrial production in the US was -0.3%. but the actual data was -0.8%, lower than expected, and so on.

Why is that important? Because from the macro perspective it drives 10-year U.S. Bond yields (when yields drop then bond prices goes up, admittedly at a different pace). 

Redline on the chart shows Citi US Economic Surprise Index, blue line 10-year U.S. Bond yield 13-week change in basis points (one basis point is 0.01%). As you can see, the correlation between those two is really high and can be useful in determining the main trends in U.S. bonds.

It is also partly related to the U.S. GDP Growth data. 
Crescat Capital LLC combined New York Fed U.S. GDP Growth forecasts for the last six years.

The New York Fed Model Points out for 0.39% U.S. GDP Growth in the fourth quarter, much lower than in 2015 when in the last quarter GDP Growth was almost 0.

It seems like the broader slowdown may finally reach not only U.S. Manufacturing sector but the entire American economy.

2. Three banks in the United States have collapsed over the past month, four over this year, out of more than 4700 operating in the U.S. It is a negligible number but worth to follow in the future.

3. Japan is considering 50-year government bonds issue in order to lock cheap funding for the government, give investors higher returns as well as have better control of the yield curve.

4. The biggest easing cycle in a decade. 

The chart shows that more than 60% of central banks are easing their monetary policies (cutting interest rates and increasing the money supply).

Grey area = previous recessions. 

The subsequent chart shows that central banks' cutting rates (part of monetary easing) lead Purchasing Manager Indexes (PMIs) by 8 months.

The PMIs show the direction of economic trends in the manufacturing and service sectors. Above 50 means sector expansion, below 50 sector contraction. Will these massive easing help the economy to pick up or we will see a repeat from 2001-2002 and 2008-2009?

5. Very useful chart from the Moody's rating agency, showing the most significant risks for the global economy and likelihood of adverse shocks.

 According to Mark Zandi the chief economist at Moody’s Analytics: “If the president follows through on his threat to raise tariffs again on China in December, a recession next year is likely”

Remember, the China-US trade war is the accelerator of the slowing business cycle.

6. This is a fantastic chart of the combined balance sheet of the Federal Reserve, European Central Bank, People's Bank of China and Bank of Japan. 

It looks like artificially supported economies and markets over a decade.

Central bank's assets rose in October by the most since last December. Thus, Central Banks are in a full easing mode again.

This number will certainly change and according to some banks' forecasts, central banks' assets may increase to $21-22 trillion. Here is one from Deutsche Bank.

According to DB, in 2020 four major Central banks will increase their balance sheets by 1$ trillion. 

7. As Financial Times noted, Bank of Japan (BoJ) have not made any purchases of domestic stocks for  the last 40 days as they lower the pace of their asset purchase program (tapering)

Bank of Japan currently owns 80% of the domestic Exchange-Traded Funds(ETFs) and 5% of the Japanese Stock Market.

BoJ will be also the biggest holder of Tokyo-listed stocks in the mid-next year overtaking the Government Pension Investment Fund.

In the period from January to the end of October companies share repurchases in Japan were 136% higher than a year ago.

Let's add to this Bank of Japan total assets on their balance sheet divided by GDP (white line):

source: Holger Zschaepitz, twitter

As I noted in one of the tweets:

Corporate profits as % of sales in Japan have been increasing over the last decade (top-left chart). To be sure, I checked corporate profits in nominal terms or yens (top-right chart).

The bottom left chart shows Nikkei 225 Total Return Index (nominal terms including dividends) and the bottom right of the ETF iShares MSCI Japan (in dollars). All the above factors contributed to such a rise in the Japanese Stock Market. 

Meanwhile, the economy is struggling with record debt, low inflation and growth.

8. According to Chinese central bank adviser Ma Jun, China still has room for fiscal, monetary and real-estate policies to combat the economic slowdown and U.S.-China trade war.

To understand how much room China has and what problems is currently facing, it is very useful to read this thread made by Michael Nicoletos on Twitter,

as well as the article written by Tuomas Malinen, Ph.D., Chief Economist of GnS Economics titled: "China (and the world economy) at the end of the road" 

9. Quick review over the Purchasing Manager Indexes (below 50 means sector contraction, above 50 sector expansion).

- Markit Eurozone Manufacturing Purchasing Manager Index (November Preliminary Reading): 46.6 (est 46.4, prev 45.9)
- Markit Eurozone Services PMI (Nov Prem.): 51.5 (est 52.4, prev 52.2), 10 month low.
- Markit Eurozone Composite (Nov Prem.): 50.3 (est 50.9, prev 50.6)

United States:

- Markit U.S. Manufacturing PMI (Nov Prem.) rose to 52.2 in Nov from 51.3 in Oct. Fastest rate since April.
- Markit U.S. Services PMI (Nov Prem.) rose to 51.6 from 50.6. Quickest expansion since July.
- Markit U.S. Composite (Nov Prem.) rose to 51.9 from 50.9. The highest pace since July.

10. Have you ever wondered what share of total equity trading account for investors actually picking and buying stocks on the market? Here is the answer. 

Only 9.9%.

11. At the end, one quote from the Sovereign Man article:

"These are the new five scary rules of upside-down capitalism:

- Debt is wealth

- Loss is the new profit

- ‘Wokeness’ above all else

- Rich people are evil

- Socialism makes sense"

You may agree or disagree.

Have a great week ahead!

Disclaimer: This content includes only personal opinion and that should not be considered professional financial investment advice.