Good Vibes

Good vibes.  Stocks climbed yesterday because traders liked what they heard from Mario Draghi and President Trump.  Dovish statements by the ECB President stoked the markets and a Trump tweet pushed stocks to within arms length of all time highs.

 

MY TWO CENTS

 

1.  Selective hearing is bad.  Stocks soared yesterday in response to a Trump tweet stating that he had a good phone call with President Xi of China and that the two would be meeting at next week’s G-20 summit in Japan.  The usual narrative around that would be: markets rally on trade hopes.  It seems however, that traders are content to drive stocks up on the headline without carefully examining the facts.  Administration officials have been lowering expectations for a substantive deal for weeks leading up to yesterday’s tweet.  Robert Lighthizer in his Senate testimony yesterday told Senators that the conflict was not likely to be resolved in Japan.  The President himself in his campaign kickoff last night, WHILE YOU SLEPT, said that he would get a fair deal with China or no deal at all.  The market has high expectations for a substantive deal.  Disappointment can be painful.

 

2.  High hopes for low rates.  Equity markets are heavily invested in a Fed easing.  So much so that a slight slip in the wording of a statement can cause some indigestion.  According to Fed Funds Futures, which is a traded vehicle, the Fed is unlikely to lower rates today but there is an 83% chance of a cut in July.  Fed watchers will scrub today’s policy statement for supportive hints in the wording.  Chairman Powell is expected to further soften his tone when he speaks at the press conference that follows the policy release.  Finally, the Fed’s dot plot release, which details Fed Governors’ rate predictions will be closely watched.  If the governors themselves don’t predict a rate cut in the months ahead, all bets are off.  In essence, traders have set the table for tough disappointment, should the Fed not deliver.

 

THE MARKETS

 

Stocks and bonds took flight yesterday on expectations for rate cuts and positive trade comments from the President.  Draghi’s softening tone on ECB stimulus started the rally and President Trump’s tweet announcing a G-20 meeting sent the buying into overdrive.  The S&P500 climbed by +0.97%, the Dow Jones Industrial Average traded up by +1.35%, the Russell 2000 rose by +1.14%, and the NASDAQ 100 jumped by +1.45%.  Bonds traded up and 10-year treasury yields fell by -4 basis points to 2.05%.  Crude got some relief and traded up by +3.79% on hopes that OPEC+ will continue its production cuts.

 

WHAT’S NXT

 

– The Federal Open Market Committee wraps up its two-day policy meeting and will release its policy statement at 2:00 PM Eastern.  Rates are largely expected to remain the same but the Fed’s language is expected to lean more toward future rate cuts.  The Fed will also release its dot plot projections for future rates and it is expected to show lower rates in the future.  THIS IS BIG, PAY ATTENTION.

– DOE Crude oil inventories are expected to show a weekly drawdown of -2.25 million barrels.

– Barnes & Noble will release earnings before the bell and Oracle will announce after the close.

daily chartbook 2019-06-19