Dow Jones, Yield dynamics and Fed Put

The Dow Jones had a 1.6% rally to close above 29000 first time after March and now it stands within striking distance of claiming the all time high of 29400. The US President tweeted that “Dow Jones just closed above 29000! You are so lucky to have me as your President.” It was followed with a wink emoji just to keep people startled at whether it was done in just in jest. During the early 2000 a phrase had gained currency which was called Greenspan Put. Any put option gives a sort of insurance to the option buyer that he can enjoy the upside while being assured of no downside. The Greenspan put assured the markets to take outsized risks assured of being supported by Fed action with lower rates and easy liquidity once the downturn happens.

In his book The Irrational Exuberance, Greenspan himself recognizes that such a covert guarantee distorts market discipline and produces unanticipated results. However post the Greenspan era the guarantee has become a more generalized “Fed Put”, a version of which we are witnessing currently. Easy money, low rates coupled with low fresh credit offtake funnels money to a path of least resistance. Some of it reaches the shores of emerging markets and some in equities. Just to give context here, the total FPI investment into Indian equity markets was close to 45600 Cr INR in the month of August.

Just to be sure that there is a difference between the main street and Wall Street, some important data points will be coming out this week. The weekly jobless claims for the US will be out today and the all important NFP data will be out tomorrow. NFP data coupled with unemployment rates and wage growth numbers will also indicate how the actual economic condition is looking. The NFP number is expected to increase by 1.4 million as per the consensus estimates. The dollar index is currently trading at 92.93 and 10 year US yield is trading at 0.66. In other market news, the Euro is back to 1.18 levels, Crude is trading at 44.5$/bbl, gold is trading around 1940$/oz, and offshore the Chinese yuan is trading at 6.84.

Domestically there has been a cheer for the bond markets as the yields have traded leftwards. From the highs of 6.2 seen last week the new 10 year benchmark bond GS 5.77 2030 is trading at 5.90 now. There was one clarification issued by the RBI yesterday on increasing the HTM measure which was announced on Monday, as per the clarification banks can hold under HTM category the SLR securities acquired on or after Sep 1, 2020 up to a limit of 22% of NDTL i/o 19.5% earlier. Counting in HTM category provides a cover from the MTM movement for the bank and it increases the attractiveness of government securities. As this is only applicable to new acquisitions it also increases the demand for G secs going forward, allowing government to sell more debt at lower prices.

The rupee trades lower today at around 73.33.