With global equity markets now sprinting higher in a furious meltup to daily record highs, one which will most likely not end until the bubble finally bursts, destroying any shred of credibility the Fed and fractional reserve banking have left (while leading to brisk sales of pitchforks) but not before generating countless headlines such as these...
The term of the week is 'melt-up' pic.twitter.com/6phpDc47uW— Mark Constantine (@vexmark) January 12, 2018
... we said - following Bill Dudley's surprisingly hawkish speech yesterday - that the odds of a surprise rate hike under Jerome Powell are now especially high.
Dudley repeating that "financial conditions today are easier than when we started to remove monetary policy accommodation" means odds of surprise rate hike under Powell are high— zerohedge (@zerohedge) January 11, 2018
This morning, Bank of America's Michael Hartnett, in his weekly Flow Show report, touches on this growing possibility, specifically of when, and what level in the S&P, will the Fed engage in a surprise rate hike. Here is BofA:
SPY me to the Boom: #1 FAQ is "what level of bond yields will cause equity markets to fall?"; better question is "what level in SPX causes Fed to start hiking 50bps"
Well, judging by Thursday's close, it's not 2767, which is why Hartnett reminds clients of what BofA's Q1 targets are: SPX 2860, CCMP 8000, GT10 2.85%, EUR 1.10.
Arguably, that's where the Fed will wake up and realize that it has blown its third consecutive, and biggest ever bubble, something which another Bank of American, Barnaby Martin, pointed out two months ago:
"the irony in today's world is that central banks are maintaining loose monetary policies to generate inflation…in order to ease the pain of a debt "supercycle"…that itself was partly a result of too easy (and predictable) monetary policies in prior times."
Or maybe not, and the Fed will just keep pushing risk assets higher and higher as the alternative is nothing short of violent social conflict.
Meanwhile, judging by the fund flows in the first week of the year, it is clear that investors are fully confident that the Fed will never pull away the punchbowl: as Hartnett explains, it's a "maximum bullish barbell boom" in which "the new year kicked off with blockbuster $24.4bn inflows into equities, the 6th largest equity inflows on record (split between $21.7BN in ETFs and $2.7BN in mutual fund inflows), and big $13.7bn inflows into corporate & EM bonds - the largest in 31 weeks - which the BofA strategist calls "the beginning of the bull capitulation."
Some other fund flows details:
Looking at Bank of America client indicators, Hartnett sees nothing but froth and euphoria:
What happens next? According to the BofA strategist there are two "great" trades on deck:
Finally, according to Hartnett, should the Fed not get involved, just two things can stop the party and prevent a risk asset overshoot in early 2018: wage inflation & >3% yields, and/or trade war (EPS -ve). Everything else is noise.