Hirst: Look to FX Markets and Emerging Market Bonds for Price Discovery in Global Markets

Your Real Vision Daily Briefing for April 16, 2020

Roger Hirst and Ed Harrison discuss FX markets, high yield credit, and EM fixed-income through the lens of the “dollar milkshake theory” and more.

  • Markets aren’t selling off on bad news, which suggests good things are happening from a Fed liquidity perspective. 
  • However, the Fed bidding up assets is putting an artificial floor under them, which has made price discovery in US markets impossible.
  • At some point the Fed will have to draw a line in the sand even though they say unlimited QE; it will likely occur somewhere in the high yield, equity, leveraged loan universe.

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Markets in the US, led my Amazon (AMZN) and Netflix (NFLX), are performing well, and we’re not seeing selloffs in reaction to bad news, which shows the Fed’s support is making a positive impact, Ed Harrison and Roger Hirst said during today’s Real Vision Daily Briefing.

One drawback to this is that the Fed bidding up assets has put an artificial floor under them, which has made price discovery in US markets virtually impossible. Harrison and Hirst said that the place to look for price discovery in the global market is FX markets and emerging market bonds.

They argued that the more the Fed does the more attractive the US becomes because investors want to buy what the Fed is buying. If investors think all assets in the US are backed by the Fed with unlimited QE, they’ll buy those assets and not emerging markets, which can’t back their own economies.

Because of the scale of what is happening, Harrison and Hirst said that in some ways the world is looking at the Fed to bail them out, but that the Fed will have to draw a line in the sand; they may have opened swap lines, but they won’t bail out the world’s corporates.

In the US, Harrison and Hirst said the Fed’s line will likely be drawn “somewhere in the high yield, equity, leveraged loan universe.” Harrison also mentioned lower grade US high yield and the Russell 2000.