BofA: “In Every Market Shock Since 2013 Central Banks Have Stepped In To Protect Markets”

Wednesday, December 6, 2017
By Paul Martin

by Tyler Durden
Dec 6, 2017

There is a reason why those calling for a crash, or even a market correction in the past decade, have been carted out feet first: central banks, and noweher was this more obvious than the shocking aftermath of Brexit. The UK’s Brexit vote (Jun-16) marked the point when the buy-the-dip trade became a self-fulfilling put, according to a new analysis by Bank of America.

However the buying did not develop on its own: “From the taper tantrum in 2013 through the Aug-15 China devaluation shock when Yellen decided not to raise rates due to “weak equities” (which were only down just over 10% from life-highs) the Fed consistently (even if only verbally) supported markets during stress.”

At that point the “buy the dip” Pavolovian reflex was so strong, central banks could dit back and watch: sure enough, when in early 2016 Yellen suggested the Fed may need to move more “cautiously” because of the risk of Brexit, once Brexit happened, the market rebounded so quickly (3 days) it did not need to step in. From that point forward, dips have only become shallower as investors compete for “dip alpha”.

Or as BofA summarizes, “In every major market shock since the 2013 Taper Tantrum, central banks have stepped in (even if verbally) to protect markets. Following the Brexit
vote, markets no longer needed to hear from CBs as they rebounded so quickly that CBs didn’t need to respond. Buy-the-dip has a become a self-fulfilling put”

This brings up two interesting observations: i) the Fed put is falling with rising rates, and ii) paradoxically the market needs a shock to discover what the new “strike price” is, yet this is impossible due to BTDers stepping in assuming the Fed backstop. BofA explains:

The Fed put strike is falling with rising rates even if markets don’t realize it. As our Head of Global Economics, Ethan Harris, has pointed out, sitting at the lower bound in rates put the Fed in risk-management mode, meaning they had to be ultrasensitive to the risk of making a policy mistake as they had no traditional ammunition to fight a potential downturn. But as the Fed gradually increases rates, and with markets seemingly unconcerned, they will inherently become less sensitive to risk. In other words, the Fed put strike is falling both because the Fed is rebuilding ammunition, and because it recognizes that markets can better stand on their own. Of course surprise inflation remains the real killer as it would effectively handcuff the Fed from providing a high strike put, and will require much higher stress before they can step in.

The Rest…HERE

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