SMCCF To Be Unwound

Speculation around when the Fed will begin tapering its massive monetary stimulus programme jumped back into focus overnight. In one of the first moves that signal the beginning of the end, the Fed released a statement outlining that it will begin unwinding its Secondary Market Corporate Credit Facility (SMCCF). The facility which was launched during the height of the pandemic at $750-billion, was created as a Special Purpose Vehicle (SPV) and was one of many unprecedented actions the Fed took during that time.

Ground-Breaking Support

The SMCCF was a ground-breaking move by the Fed as it was the first time the central bank included corporate debt issuance in its asset purchase program. Additionally, within these corporate purchases the Fed took the hugely unexpected move of allowing junk bonds to be included in its purchases. The vehicle was intended to be a catch-all system to help fund businesses throughout the pandemic and was set up via treasury funding issued by the government as part of the cares ACT.

Gradual Unwinding

In its statement overnight the Fed said the unwinding of its assets “will be gradual and orderly, and will aim to minimize the potential for any adverse impact on market functioning by taking into account daily liquidity and trading conditions for exchange traded funds and corporate bonds.”

$13.8 Billion in corporate Holdings

The scheme has been frozen since December 31st 2020 when the (then) treasury secretary Steven Mnuchin refused to extend the scheme, so the assets being sold were those purchases during the height of the pandemic last year. In its most recent accounts published in May, the Fed listed $13.8 billion in corporate holdings including corporate bonds, bond ETFs, junk bonds and junk bond ETFs. The scale of the holdings and the program in sum, was always only a minor part of the Fed’s $7.9 trillion balance sheet. However, the principle here is the removal of support.

Labour Data in Focus

Looking ahead this week, the focus is of course on the jobs number tomorrow though today’s ADP release is likely to cause some volatility on a big surprise either way. If tomorrow’s numbers are strong, USD is likely to rise on increase Fed tapering expectations. Similarly, a miss will send USD lower.

Technical Views

S&P500

Equities are holding in a tight block of consolidation near highs, ahead of the data tomorrow. If USD moves higher equities could see a sharp move below the 4182.50 level. Given the bearish divergence in both MACD and RSI, this move could quickly see a test of 4116 level. Alternatively, if USD tanks, we could see a break above the 4236.50 level.

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