Market Throws Tantrum Over the End of Easy Money

There are several things weighing on the precious minds of investors. First is BREXIT. Then it’s the specter of a laughable Fed interest rate hike. On December the 4th, 2016, the people of Italy get to vote on whether to say ciao to the EU or not. And, lastly, European QE is scheduled to conclude in March.

In March of 2017, the losers at the ECB will end their Frankenstonian experiment in the debt markets — paving the way for a blow out in yields for the PIGS (Portugal, Italy, Greece and Spain).

“QE is due to run until March 2017, and the most likely outcome to us is that it goes on for at least another six months at 80 billion euros per month after that,” said Marchel Alexandrovich, senior European economist at Jefferies International Ltd. in London. “Later in 2017, the ECB could think about tapering, and say try to wind down the program in March 2018, but these are hypothetical exit strategies, not something the ECB will likely implement for a while. Ultimately, the decision will be driven by the outlook for inflation.”

While the ECB’s final decision will depend on the euro area’s economic outlook, it will also be affected by the success of attempts to address a scarcity of assets to buy. The Governing Council has tasked its committees with considering adjustments to QE, such as loosening self-imposed rules that make some bonds ineligible. The next policy meetings are scheduled for Oct. 20, Dec. 8, Jan. 19 and March 9.

Even when QE finishes, the ECB’s balance sheet won’t shrink immediately. The central bank has already committed to reinvest the cash from maturing bonds. That means the stimulus effect will be maintained until the end of 2020, Dutch central bank governor Klaas Knot said last month.

I find it very hard to believe Portuguese bond wills remain low yielding after QE ends. The whole idea around QE was to rig the rates that were diverging from Germany, in an effort to save the union. All of this might be moot, if in fact the Italians vote to leave on December the 4th.

The fear of this gigantic tit being stripped away from markets is having an onerous effect on stocks and the precious metals, with the Dow off by 120 and silver cascading lower by 5.5%. Market breadth stands at 28% for the day, so the selling isn’t isolated to just a few sectors. But, for the most part, the serious damage has been cordoned off in rate sensitive industries, like utilities, REITs, gold and big dividend payers.

Ridiculously, bonds are selling off aggressively — due to comments by a non-voting Fed member who is calling for a most obscene 100bps hike.

And then there’s the issue of having to unwind the whole thing.