The doves have lifted up the US equities in a pivotal week of Central Bank meetings.
BEEF Boys
Bond Bears
Till Doves Do the US Equities Part!
BEEF Boys
The BEEF boys, named after the BOJ, ECB, England's BOE and Fed, are the largest Central Banks doves in the world.
Here is a summary of their dovish tilt last week:
Bank of Japan (BOJ): Even though the BOJ has decided to abandon negative interest rates in its recent meeting, it plans will continue to buy JGBs to keep conditions accommodative. Additionally, it will allow long-term JGB yields to be determined by market forces.
European Central Bank (ECB): The ECB is preparing to reduce interest rates and could cut by 25 basis points in June. Additional easing measures could also take place as the threat to inflation expectations diminishes.
Bank of England (BOE): The BOE's tone has notably shifted since the beginning of 2024. The tightening bias was dropped in February. Now, it has indicated a possibility of policy easing in the coming months.
Federal Reserve (Fed): Fed Chair Powell's post-Fed meeting comments were more dovish than expected. He expects inflation to move downwards and rate cuts to be happening soon without delays. The Fed could also reduce the pace of its balance sheet reduction "fairly soon", providing a dovish boost to markets.
Bond Bears
History is not on the side of Bond Bears.
From my analysis of the bond bear markets in the past two decades, there have been four bear episodes:
Post-Great Financial Crisis (Mar-2008 to Mar 2010)
Taper Tantrum (Jul-2012 to Dec-2013)
Post-COVID Crisis (Jul-2020 to Mar-2021)
Higher-for-Longer (Nov-2021 to Oct-2023)
A bond bear market typically starts when long-term yields are at around 2%.
During such periods, yields tend to rise by approximately 1.9%, resulting in a 24% drop in the share price of the TLT ETF (iShares 20+ Year Treasury Bond ETF).
Currently, long-term yields are at 4.6%, much higher than the starting 2% levels. This makes any bond bear market a remote possibility.
Furthermore, the Fed is expected to cut interest rates three times this year, in line with the dovish bias of the BEEF boys. So this will provide support for the bond markets.
Till Doves Do the US Equities Part!
Years ago, when my wife and I got married, we recited our marriage vows from memory, symbolizing a deep commitment to each other.
It was nerve-wracking, but we managed to nail it flawlessly, earning thunderous applause from our guests.
Anglican Marriage Vow:
I,________________take you, ______________to be my wife, to have and to hold from this day forward; for better, for worse, for richer, for poorer, in sickness and in health, to love, cherish, and honor, till death do us part, according to God’s holy law, and this is my solemn vow.
Similarly, the bull run in the US equities seems to be living happily ever after;
for better news,
for worse news,
for richer valuation,
for poorer valuation,
in sickness fundamentals,
and in health conditions,
till doves do us part.
The fate of the US equities is bound to the doves, akin to a marriage, "till doves do us part."
This may seem paradoxical but, on closer look, it makes a lot of sense.
Let me explain.
Ironically, it is the doves who could ultimately bring an end to this bull run.
This could happen in two scenarios below:
Central banks are adopting dovish stances despite record-high US equities. This might inadvertently trigger inflation and undermine the credibility of the BEEF boys. The long end of the bond curve could sell off again and lead to a heavy pullback of the US equities.
Another scenario is when central banks conduct extreme dovish actions arising from an unexpected crisis. This will lead to a loss of confidence and result in an ugly downturn in the markets.
In essence, the fate of this bull run hinges on the actions of the doves. They have the power to either make or break this bull run.
But until then, the market remains in a blissful state.
Till Doves Do the US Equities Part!
P.S. This post is dedicated to my lovey dovey wife!