· Fed says it will start selling corporate bonds, dollar yawns
· Crude oil storms higher as traders bet against Iran deal
· Markets quiet ahead of key data, but meme stocks strike back
Fed to unwind corporate bond holdings
The currency and equity markets remain frozen in a holding pattern, unable to break out even after the Fed announced it will start selling the corporate bonds it bought last year when the credit sector was in tatters. This serenity in the markets likely comes down to how small the Fed's corporate bond portfolio is.
The central bank holds only a few billion dollars of these bonds, which is a drop in the ocean. Its actions were always symbolic in this field. By stepping into the corporate bond market during the darkest days of the crisis, it signaled that it will backstop the entire sector if necessary, which was all investors needed to calm down.
While the amount is insignificant, the signal is equally important this time. It highlights that the Fed is moving towards tapering its actual QE program, something that regional president Harker confirmed yesterday by saying it is 'time to at least think about thinking about tapering'. He is the fourth FOMC official to make this suggestion.
In the big picture, this is good news for the dollar and bad news for stocks. The Fed is stealthily planting the seeds for normalizing monetary policy, which could become the dominant market theme by the late summer or fall, assuming US economic data remains strong.
Oil prices break out, meme stock mania round two
The overall market might be at a standstill but oil prices didn't get the memo. Crude keeps powering higher, with a little help from OPEC's silence about future production increases and a rapidly improving demand backdrop. In addition, some players seem to be betting against a US-Iran nuclear deal.
While the message from the various diplomats remains optimistic, news that Iran continued to enrich uranium during the negotiations may have led some investors to conclude it is negotiating in bad faith, and therefore bet against a diplomatic breakthrough. Crude oil's fortunes now hang on the outcome of these talks.
Elsewhere, the meme stock mania has returned with a vengeance. Shares of movie theatre chain AMC gained 95% yesterday alone, pushing the gains for the year beyond 3000%. What started as an epic short squeeze has matured into a proper casino, where hordes of small traders weaponize call options.
Purchasing a call option on a stock allows traders to command more buying power than simply buying the stock, and forces the primary dealers that sold those options to hedge their price exposure by buying the stock as well. Combine that with heavy short interest and a stock with relatively small capitalization, and it's a recipe for some explosive moves.
Crucial US data to set the stage for nonfarm payrolls
As for today, the spotlight will fall on the ISM non-manufacturing PMI. Markets will pay close attention to how inflationary pressures are evolving and how the labor market is doing, ahead of the nonfarm payrolls report tomorrow. Similarly, the ADP jobs report today will give us more clues around the employment situation, even though the correlation with NFP is rather weak.
There's also a slew of Fed speakers on the agenda. The Fed's Bostic will get the ball rolling at 16:30 GMT ahead of Kaplan at 17:00 GMT, then Harker at 17:50 GMT, and finally Quarles at 19:05 GMT. The latter three have all dropped hints about QE tapering lately and if they echo a similar message in unison, the market could wake up from its slumber.