My alarm bells are ringing…
Wednesday saw the Federal Open Market Committee meet to set the interest rates for the US.
They hiked by 25 basis points.
The dollar was sent absolutely reeling…
These following charts show us what happened…
Cable rallied heavily as seen above. Below, USD/JPY has fallen massively.
Why has the dollar reacted in this way?
Well, this rate hike has been priced in for a while now.
Large traders know that in order to shed the Fed’s balance sheet, the base rate has to be raised.
This means that hikes will be expected…
So you can chuck that economic theory out of the window – especially when it comes to the dollar.
Essentially, we are trading expectations and not reality. People are trying to ‘frontrun expectation‘.
This means they want to get in before the event and get out when the event occurs.
This is where ‘buy the rumour, sell the fact‘ comes from.
Echoes of 2008
I know, it’s a worrying subhead…
But there’s also something else that is seriously noteworthy worth taking a look at…
Below is the daily and weekly charts of the bank index, $BKX.
We have just had a daily triple top into…
The 2008 banking crisis high.
And today, we are 50 basis points off of that high.
This is very scary for two reasons…
Firstly, the banks do not have the capability to convert debt to equity via AT1 bonds, especially in Europe.
These bonds prop the share price up when it drops too low and provides a more solid capital base so the bank remains solvent.
The issue is that no one really knows the pricing risk of these and whether they’ll work on a mass scale.
And this is because of the gross derivatives exposure.
Deutsche Bank has a gross derivatives exposure of $75tn…
What if liquidity dries up and they’re left with a hell of a lot of liabilities?
They go under.
I am on heightened alarm now – and I have never felt like this before.