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Month: July 2021

Home prices could cool when the Fed tapers its bond-buying program. But a crisis? Unlikely

U.S. home prices have been rising at a record annual pace in recent months, fueled in part by historically cheap credit, the absence of properties for sale, and the scramble by households for more space as families have fled to the suburbs during the pandemic.

Can the good times last when the Federal Reserve finally cuts back on buying mortgage and Treasury bonds? Here’s how mortgage rates and a less gargantuan central bank footprint could impact the heated U.S. housing market.

“The Fed is certainly talking and thinking about it,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research, on the subject of how the Federal Reserve could scale back the central bank’s $120 billion a month bond-buying program.

But Jones also thinks tighter credit conditions, likely via higher borrowing rates as the Fed tapers its bond buying program, might end up being a saving grace for today’s housing market.

“Housing prices could certainly pull back, after accelerating so fast,” she said, pointing to households fighting over the few properties available to buy, while navigating work from home. “At some point,” she said, mortgage payments on high-priced homes “become unsustainable with people’s incomes.”

“But I don’t see a big housing debacle.”

How to pump the brakes on housing

The central bank has maintained a large footprint in the mortgage market for more than a decade, but the worsening affordability crisis in the U.S. housing market led Fed officials to walk a tightrope recently when trying to explain its ongoing large-scale asset purchases during the pandemic recovery.

Fed officials in recent weeks have expressed a fair bit of disagreement around the timing and pace of any scaling back of its large-scale asset purchases.

St. Louis Fed President James Bullard said Friday the central bank should start to slow down its bond purchases this fall and finish by March, saying he thought financial markets “are very well prepared” for the reduction in purchases.

During a midweek press briefing, Chairman Jerome Powell said tapering likely would start with agency mortgage-backed securities (MBS) and Treasury bonds at the same time, but also “the idea of reducing” mortgage exposure “at a somewhat faster pace does have some traction with some people”.

The blue line in the chart below traces the central bank’s balance sheet and abrupt path to a $8.2 trillion balance sheet since 2020 when its efforts to support markets during the pandemic began, with the red line representing its Treasury
holdings and green line its MBS.

Fed holds major cards in MBS and Treasury markets

St. Louis Fed data

As of July 29, the Fed was holding about 31% of the roughly $7.8 trillion agency MBS market, or housing bonds with government backing.

“You could make the case that the Fed owns almost one-third of the agency mortgage bond market, and that it might make sense to loosen its grip,” Jones said, particularly as Powell has played down a direct link between its MBS purchases and climbing home prices.

It may now seem like a distant memory, but before the pandemic upheaval, that was precisely what the Fed was trying to do.

“Who would have thought,” said Paul Jablansky, head of fixed income at Guardian Life Insurance, that the U.S. would be in the midst of “one of the frothiest housing markets in history,” following last year’s extreme pandemic shutdowns that closed businesses, workplaces and national borders.

“Occasionally people ask, are we at the peak?” said Jablansky, a 30-year veteran of the mortgage, and asset-backed and broader bond market. “We are outside the balance of our experience, so it’s very difficult to say we are at the peak,” he told MarketWatch.

“I do think house price inflation will have to slow down dramatically. But maybe the biggest question is, can we see housing prices go negative? I think the Fed will work very, very hard to create a soft landing in house prices.”

Schwab’s forecast has been for the Fed to kick things off by reducing its monthly asset purchases by $15 billion to $105 billion. That would mean cutting $10 billion from its current $80 billion monthly pace of Treasury purchases and $5 billion from its $40 billion monthly pace of MBS.

“So far, we haven’t changed that,” Jones told MarketWatch.

While the Fed doesn’t set long-term interest rates, its mass buying of Treasurys aims to keep a lid on borrowing costs. Treasury yields also inform the interest rate component of 30-year fixed-rate mortgages. So perhaps, scaling back both at once makes sense, Jones said.

Misremembering the 2013 taper

Fed Chair Powell said on Wednesday that the central bank’s “substantial further progress” standard for unemployment and inflation in particular hasn’t been met yet, while stressing that he’d like to see more progress in the jobs market before easing its monetary policy support for the economy.

Powell also frequently has talked of lessons learned from the market upheaval of 2013, the so-called “taper tantrum” that rattled markets after the central bank began talking about taking away the punch bowl, as the economy healed from the Great Recession of 2008.

“What we need to remember,” Jablansky said, is that markets sold off in anticipation of tapering, not the actual pull back in asset purchases. “Later in the year, the period [former Fed Chair Ben] Bernanke was talking about, the Fed actually continued to buy assets, and the amount of accommodation it provided to the economy actually went up.”

Historically, the only stretch where the Fed has actively withdrawn its support occurred between 2017 and 2019, following its controversial, first foray into large-scale asset purchases to unfreeze credit markets post 2008.

“It’s very difficult to draw a lot of conclusions from that real short period,” Jablansky said. “For us, the conclusion is that 2013 may be instructive, but the circumstances are really different.”

See: Why the Fed’s balance sheet is expected to top $9 trillion after it starts reducing its monthly asset purchases

The message from Powell consistently has been about preserving “maximum flexibility, but to go very slowly,” said George Catrambone, head of Americas trading at asset manager DWS Group.

Catrambone thinks that may be the right strategy, given the uncertain outlook on inflation, evidenced by, the recent spike in the cost of living, but also because of how significantly many of our lives have changed because of the pandemic.

“We know that a used car won’t cost more than a new car forever,” Catrambone said. “Do I think the housing market slows down? It could. But you really need the supply, demand imbalance to abate. That could take a while.”

Extreme wildfires, drought and other shocks of climate change have been tied to $30 billion in property losses in the first half of 2021, while putting more patches of land and U.S. homes in the path of danger. While these were less frequent housing market topics in 2013, the pandemic also changed the whole notion of “what is safe” for many families.

“Migratory patterns tend to be sticky,” Catrambone said, of the flight out of urban centers to suburbia.

What’s more, the delta variant fueling a new wave of COVID-19 cases has led to stricter masking and vaccination policies, including at Alphabet Inc.,
Facebook Inc.
and others, but also delayed plans by many big companies to return staff to offices buildings.

“This probably doesn’t help occupancy rates for commercial real estate, with more people likely staying closer to home,” Catrambone said, but it likely adds to the already high “psychological value placed on housing.”

After touching record highs, the S&P 500 index
Dow Jones Industrial Average
and Nasdaq Composite Index
closed Friday and the week lower, but booked monthly gains.

On the U.S. economic data front, August kicks off with manufacturing and construction spending data, followed by motor vehicles sales, ADP employment and jobless claims, but the main focus of the week will be the monthly nonfarm payrolls report on Friday.

Read: Climate risk is hitting home for state and local governments

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India’s gold demand rises 19% in June quarter, lags pre-Covid level

With this, overall gold demand in the first half of the calendar year 2021 rose 30% to 216.1 tonne but it still trailed the pre-pandemic five-year (H1 of 2015-2019) average by as much as 35%.Gold demand in India, the world’s second-largest consumer, rose 19% year-on-year to 76.1 tonne in the June quarter, driven primarily by a favourable base due to a nation-wide lockdown last year, according to the data released by the World Gold Council (WGC) on Thursday.But on a quarter-on-quarter basis, demand plunged 46% during the April-June period, as the second Covid wave prompted some state governments to resort to localised lockdowns. With this, overall gold demand in the first half of the calendar year 2021 rose 30% to 216.1 tonne but it still trailed the pre-pandemic five-year (H1 of 2015-2019) average by as much as 35%.Although the performance in the first half is far from encouraging, the WGC expects the underlying demand momentum to support a “sharp spike in demand once normalcy is restored on the Covid front”. In the December quarter, festivals, such as Dussehra and Diwali, coupled with the wedding season, could boost gold consumption. Of course, consumer confidence and business response are subject to the impact of a looming threat of the third Covid wave and the pace of economic recovery.The WGC data showed gold imports in India shot up to 120.4 tonne during the April-June quarter from just 10.9 tonne a year earlier when a nation-wide lockdown had hit the supply chains. In value term, the country’s gold demand rose 23% in the April-June period to Rs 32,810 crore. While jewellery demand rose 29%, investment demand rose by 10%. However, in volume term, jewellery demand rose at a slower pace of 25% to 55.1 tonne, while investment demand grew 6% to 21 tonne.Total gold recycled during the June quarter was 19.7 tonne, up 43% from a year before.Global demand falls 1%Global gold demand eased 1% on year to 955.1 tonne in the June quarter, taking the demand in the first half of the calendar year to 1,833.1 tonne, down 10% from a year before. At 390.7 tonne, jewellery demand continued to rebound from last year’s Covid-hit weakness, but it still remained well below typical pre-pandemic levels, partly due to weaker growth in Indian demand, the WGC said.In the first half, jewellery demand dropped 17%. However, bar and coin investment saw a fourth consecutive quarter of strong gains, with demand hitting 243.8 tonnes in the April-June period. Such investments hit 594 tonnes in H1, the strongest since 2013.Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

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Pro traders look for this classic pattern to spot Bitcoin price reversals

Every trader aims to buy low and sell high, but only a few are able to muster the courage to go against the herd and purchase when the downtrend reverses direction. 

When prices are falling, the sentiment is negative and fear is at extreme levels, but it’s at times like these that the inverse head and shoulders (IHS) pattern can appear.

The (IHS) pattern is similar in construction to the regular H&S top pattern, but the formation is inverted. On completion, the (IHS) pattern signals an end of the downtrend and the start of a new uptrend.

Inverse head and shoulders basics

The (IHS) pattern is a reversal setup that forms after a downtrend. It has a head, a left shoulder and a right shoulder that are upside down and placed below a neckline. A breakout and close above the neckline completes the setup, indicating that the downtrend has reversed.

Head-and-shoulders bottom pattern. Source: TradingView

As shown above, the asset is in a downtrend but after a significant decline, value buyers believe the price has reached attractive levels and will start bottom fishing. When demand exceeds supply, the asset forms the first trough from the left shoulder and the price starts a relief rally.

In a downtrend, traders sell on rallies. The bears sell aggressively after the pullback and the price dips below the first trough, making a lower low. However, bears are unable to capitalize on this weakness and resume the downtrend. The bulls buy this dip and start a relief rally, forming the head of the pattern. As the price nears the previous peak where the rally had stalled, the bears again step in.

That starts the decline, culminating in the formation of the third trough, which is arrested almost in line with the first trough as buyers anticipate a turnaround and purchase aggressively. This forms the right shoulder of the setup. The price turns up and this time, the bulls manage to push the price above the neckline, completing the pattern.

The neckline thereafter becomes the new floor as traders buy the dip to this support. This signals the start of a new uptrend.

Identifying a new uptrend with the (IHS) pattern

BTC/USDT daily chart. Source: TradingView

Bitcoin (BTC) had been in a downtrend since forming a local top at $13,970 on June 26, 2019. The buyers stepped in and arrested the decline in the $7,000 to $6,500 support zone, forming the left shoulder of the (IHS) pattern. This started a relief rally that pushed the price to $10,450. At this level, short-term bulls booked profits and bears initiated short positions, aiming to resume the downtrend.

Aggressive selling broke the support at $6,500 and the Bitcoin/Tether (USDT) pair plunged to $3,782.13 on March 13, 2020. The bulls viewed this fall as a buying opportunity and that started a strong relief rally, which reached close to $10,450. This second trough formed the head of the setup.

The right shoulder was shallow because the selling pressure was reduced and bulls did not wait for a deeper correction to buy. Finally, the bulls pushed the price above the neckline on July 27, completing the (IHS) pattern.

The bears tried to trap the bulls and they pulled the price back to the neckline. Although the price dipped just below the neckline, traders did not allow the pair to sustain below $10,000. This suggested a change in sentiment. The bullish momentum picked up as buyers pushed the price above $12,500.

How to calculate the pattern target of a IHS setup

BTC/USDT daily chart. Source: TradingView

To calculate the minimum target objective of the (IHS) pattern, calculate the depth from the neckline to the lowest point, forming the head. In the above example, the neckline is around $10,450, and subtracting the lowest point at $3,782.13 gives a depth of $6,667.87.

This value is then added to the breakout level, which in the above example, is near $10,550. This gives a target objective at $17,217.87. When a trend changes from down to up, it may fall short or exceed the target objective. Therefore, traders should use the target as a guide and not dump their positions just because the level has been reached.

Patience pays o because sometimes the pattern fails

No pattern succeeds at every breakout and traders should wait for the setup to complete before initiating the trades. Sometimes, the pattern structure forms but the breakout does not happen. Traders who preempt the completion of the pattern and initiate trades get trapped.

LINK/USDT daily chart. Source: TradingView

For example, Chainlink’s LINK topped out at $4.58 on June 29, 2019, and started a correction. The buyers attempted to stall the decline in the $2.20 to $2.00 zone. This formed an (IHS) pattern with a head and two shoulders as can be seen in the chart above.

Although the price reached the neckline on Aug. 19, 2019, the buyers could not push the price above it. Due to this, the pattern did not complete and the buy signal did not trigger.

The LINK/USDT pair turned down from the neckline and broke below the head of the setup at $1.96, invalidating the pattern. This trapped traders who may have purchased in anticipation of a trend reversal.

Key takeaways

The (IHS) pattern could be a useful tool for traders to jump on a new uptrend as it is getting started. There are a few important points to remember while using this setup.

Traders should wait for the pattern to complete, which happens after the price breaks and closes above the neckline, before initiating any long positions. A breakout of the neckline, which is on above-average volume, is more likely to result in a new uptrend compared to a breakout that happens on low volumes.

When a trend reverses, it generally continues for a long time. Therefore, traders should not be in a hurry to dump positions only because the pattern target has been met. At other times, the pattern completes but quickly reverses direction and the price plummets. Traders should closely watch the other indicators and price action before squaring up a position.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.