Full Moon Over the Fed and ECB

Published by WallStreetWeather.net

The market’s big gains last week were primarily attributed to speculation the European Central Bank and potentially the Federal Reserve will take accommodative policy actions when the two central banks meet at the time of the August 1-2 Full Moon.

The fluctuating cycle of the Moon is a primary indicator of market sentiment. The Full Moon represents a culmination point. Atmospheric conditions tend to become highly charged as the Full Moon illuminates the full picture. Both the positive and negative aspects of actions will receive comprehensive attention.

With the Full Moon in Aquarius, the market should be prepared for surprises and unexpected events rather than counting on the conventional wisdom. Aquarius is ruled by Uranus. Born one Uranus cycle apart, the Full Moon exactly conjoins the ECB’s natal and the Fed’s progressed Uranus in Aquarius.(1)

Aquarius/Uranus is an extreme energy, and the Full Moon illuminates the policy extremes of the two central banks. The Fed has taken interest rates to a record breaking low and has employed unconventional policy tools to promote economic growth. At the other extreme, the ECB (which has been given far less latitude to operate than the Fed), has not done enough to strengthen the health of the financial system in the Eurozone.

The ECB has set the market up to expect shock and awe, while the Fed’s failure to act now or to signal it will do so in the future would be a shock minus the awe.

Federal Reserve
The market is hoping the Fed will announce it will embark on a third round of quantitative easing at either the August 1 meeting or when or when the Fed meets again on September 13.

The Aquarius Full Moon culminates what began at the Cancer New Moon on July 19. In the New Moon Forecast I wrote:

“Saturn’s square to the New Moon reflects that monetary policy has reached its limit because the Fed is exerting too much pressure on the Treasury and mortgage markets which risks throwing the structure of the financial system dangerously out of balance.”

And as I explained in the Gemini New Moon Forecast, the Fed is having enough trouble conducting its second Operation Twist through year end. Yet despite these constraints, the Cancer New Moon conjoining the Fed’s natal Neptune reflects the market is in denial as it has become too addicted to more Fed stimulus to keep stocks inflated. The New Moon’s conjunction to the USA’s natal Mercury in Cancer and opposition to natal Pluto in Capricorn indicates the market is counting on more than the Fed’s talk therapy to keep pushing down Treasury yields so market participants can eke out a capital gain.

Mercury retrograde in Leo since July 14 has also contributed to the renewed increase in market speculation the Fed will revive quantitative easing a third time. Mercury rules the news media. Because his past articles have proved prescient in signaling the previous two rounds of quantitative easing, the market dramatically improved shortly before the close on July 24 after an article by Wall Street Journal reporter Jon Hilsenrath (“Fed Moves Closer to Action”) appeared online. Most of the major news outlets led with stories the following morning echoing Hilsenrath’s article which was nothing more than a rehash of the different “tools” that Chairman Bernanke has often repeated the Fed could employ to stimulate growth.

Yes, Mercury retrograde could indicate repeating a previous policy such as QE. And Mercury retrograde could also describe revising the “extended period” of near zero interest rates to beyond late 2014 since the extended period was first defined at the August 9, 2011 FOMC meeting which was the last time Mercury was retrograde in Leo. But while Mercury retrograde is about revisiting past matters, Aquarius and its planetary ruler Uranus describe doing something unexpected, new or completely different. For the Fed to do or signal nothing would be unexpected and different than what the market anticipates.

It is unlikely the Fed will do QE3 and if the Fed did, it would have to buy Fannie and Freddie notes or directly purchase mortgage securities with a minimum maturity of at least 5 years to avoid creating a problem for banks buying 1-3 year Fannie/Freddie notes as a Treasury substitute because of their low capital requirement and lower interest rate risk.

The Fed announced at its December 16, 2008 meeting it would begin paying 0.25% interest on excess reserves banks keep at the Fed. (This was the same meeting that the Fed lowered interest rates to their current zero to 0.25% range.) The Aquarius Full Moon conjoining Venus from 2008 could bring more attention to the possibility of the Fed reducing or eliminating the interest it pays banks to keep excess reserves at the Fed, and/or the Fed buying riskier loans from banks to free up capital so banks can make more loans.

Under the scenario of reducing/eliminating the interest paid on excess reserves, the Fed would politically be threading the needle to appease liberals (who foolishly believe the public benefits from rock bottom interest rates), and conservatives who are against the Fed further expanding the money supply and its balance sheet. Unfortunately there is no constituency to lobby on behalf of the unbanked population which is likely to increase substantially if the Fed makes such a move. This would likely result in banks increasing their fees and additional requirements for checking and savings accounts.

Banks keeping excess reserves at the Fed is a substitute for banks owning Treasuries. Treasuries are required to be used as collateral for many financial transactions. If the Fed takes interest rates paid on excess reserves below the prevailing Treasury interest rate, the Fed will put a squeeze on available Treasuries. The risk is that it will bring financial transactions to a halt by creating a squeeze on specific Treasury issues. Since financial transactions such as repos require the same issue to be returned as lent, if that Treasury is in short supply it would create a substantial negative interest rate. This would wreak havoc on the financial system given the fact that U.S. Treasury bills are a worldwide cash substitute and collateral mechanism. Therefore it would be very destructive for the Fed to follow other central banks such as the ECB that have eliminated paying banks interest on excess reserves. And there are other potentially adverse implications to eliminating interest paid on excess reserves that go beyond the scope of this post.

As I’ve previously written, the most likely action by the Fed could be additional dollar swaps in coordination with the ECB and other central banks to ensure enough dollars are available to overseas banks to conduct dollar dominated transactions. The only possible action the Fed could take that will not damage the structure of the financial system would be if the Fed bought riskier loans from banks to free up more capital for banks to make more loans. To do that, the Fed would either have to increase the size of its balance sheet or use the proceeds from maturing securities to buy the loans.

If the Fed does take action connected to buying debt or reducing/eliminating the interest paid on excess reserves it is more likely to occur at the September 13 meeting as there are multiple transits to the Fed’s natal chart and the chart for the December 16, 2008 FOMC announcement. Pluto rules debt and interest rates. Pluto’s energies will be intensely powerful then as it appears to be stationary in the sky as Pluto prepares to station direct on September 18, as Pluto squares Uranus in Aries for the second time.(2) These energies signify a wakeup call that the Fed is endangering the structural plumbing of the financial system if it continues its aggressive actions.

The second half of September into early October could be a volatile time – especially if the market realizes the capital gain game in Treasuries is over.

In my post on Venus retrograde in Gemini I predicted the ECB would take more accommodative action at their June 6 meeting. One month later, the ECB lowered interest rates to 0.75% and eliminated the interest on excess bank deposits kept at the ECB.

ECB President Draghi told the audience at a London investment conference on July 26:

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

Now President Draghi will have to walk the talk and take the kind of actions that have now become too damaging for the Fed to do. Jupiter in Gemini conjoining the ECB’s natal Sun now indicates the ECB needs to do something large enough to exceed the market’s expectations. It describes large scale stimulus with multiple components.

Mercury retrograde in Leo opposite the Full Moon and the ECB’s natal Uranus could signify the ECB reviving a previous program in a different way. With Mercury retrograde, the ECB could resume buying sovereign bonds. But this time it is likely to be on a much larger scale and unsterilized. Yes, the ECB is going to do QE not only for the Eurozone, but in “proxy” for the Fed.

With his conjunction of Venus, the Sun and Mercury in Virgo, President Draghi’s job is to strengthen the health of the Eurozone banks balance sheets. One way to do this is by taking the riskier loans off banks books to free up capital for loans. Another idea floating around is for the ECB to purchase bank bonds and corporate bonds. The real issue is the restoration of trust between banks. That would require some form of guarantee for bank debt, similar to the guarantees issued during the U.S. financial crisis.

The ECB needs to act quickly before the debt problems in Spain and Italy become much worse.
Pluto stations direct conjoining Spain’s progressed Sun in Capricorn when Pluto and Uranus square off in mid September. Spain might have to default on its debt if there is a sharp and sudden spike in bond yields.

Along with Italy’s high sovereign debt burden, Pluto’s direct station and square to Uranus impact Italy’s progressed Neptune which conjoins progressed Mars and Venus in Libra. Italy could become embroiled in a major banking scandal connected to the corruption, money laundering, and power struggles at the Vatican Bank. The tentacles of the Vatican Bank scandal could extend to other Italian, European, and perhaps even large American financial institutions.

The Aquarius Full Moon increases the potential for volatility, reversals, as well as sharp and sudden moves that break through support and resistance levels. The chart for the Aquarius Full Moon set for Washington DC (August 1 at 11:27 PM EDT) features the Sun in Leo in the sector ruling the stock market aspecting Jupiter which rules the sector representing foreign matters. Pluto is located here. The market’s optimism largely depends on whether the ECB and the Eurozone implement policies to contain yields on sovereign debt.

The market could be fairly lackluster to negative going into the Fed meeting on Wednesday, August 1. The Moon opposing Mercury could indicate the market see saws back and forth in its interpretation of the Fed’s statement. Mixed close. The market’s optimism on Thursday, August 2 could wear off in the late afternoon.

(1) Progressions move the natal planets and chart positions forward in time, symbolizing the individual or entity’s progression through life.

(2)Planets do not really change direction but appear to from Earth’s vantage point. Pluto has been retrograde since April 10. The first exact square between Uranus and Pluto occurred on June 24.

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1 comment:

Anonymous said...

what a brutal market, if not for Walmart JNJ PG XOM and the classic monopolies, we would be sub 10k on the Dow... from healthcare giants HUM, retail ANF, tech HPQ FB, solar, nat gas and coal near bankruptcies

the only indicator that this isnt a hardcore bear mkt is that the SPY is still near year highs, amazing

absolutely no reason to buy anything in quantity until its actually bottomed maybe in Oct, maybe just grinds lower for years very confusing