So Swings the Pendulum

So swings the pendulum.  On Friday, stocks looked to finish up the week on a positive note and things went bad with trade talks sending them into the red.  Despite a week full of news, both positive and negative, stocks had a relatively quiet ride.

 

MY TWO CENTS

 

1.  Follow the bouncing ball.  Last week featured activity in all of the current major market influences.  Monday saw a sharp spike in crude oil in response to a drone attack on Saudi Arabian oil fields taking about 5% of global oil production offline.  By Tuesday, crude oil prices dropped once traders realized that the supply cut could be filled by other producers’ capacity and Saudi officials spent the week saying that the effected fields would be back online in days.  The Fed had a busy week with the FOMC meeting in which they lowered interest rates as expected but came short of promising further cuts in the future.  The real news out of the Fed last week was a bit of trouble in the overnight funding market in which the Fed had to intervene in the open market (see more on that below).  At the onset of the week, there was optimism on trade in the wake of both China and the US making goodwill gestures in the prior week just as Chinese officials arrived in the US for talks.  On Friday, all of that optimism was wiped away when the President announced that he didn’t see the need to have a trade deal before the 2020 elections and that he did not prefer to have an interim deal.  Chinese officials abruptly ended their visit cancelling plans to visit Montana farms country, though it is not clear if it was in response to the President’s comments.  Last week also featured some interesting intrigue around unicorn IPO’s as WeWork’s failed initial, secondary, and tertiary attempts at going public had many wondering if it was a WeWork thing, or if it was a sign that the good days are coming to and end.  Oh… I have to mention that Brexit thing, sorry.  That remains messy as PM Boris Johnson is fighting his way through the legal system regarding his prorogation (a fancy word for sending them on a long vacation) of Parliament.  All this and still stocks remain just under their all time highs.  So where do we start this week?Geopolitical tension remains high in the gulf region as the war of words continues between the US and Iran.  The US announced more sanctions on Friday and the UK has now joined the US in placing blame for the attacks on Iran.  This morning, WHILE YOU COMMUTED, CNBC announced that Iran was releasing an impounded British tanker, perhaps as an olive branch.  Over the weekend, WHILE YOU HOPEFULLY RESTED, it became clear that the Saudi oil fields would not be brought back online as quickly as they would have us all believe.  This should keep a bid under oil (that is Wall Street talk for: prop up the price).  In the funding market, the Fed has now made open market operations a regular thing, even announcing the addition of term repos to the schedule.  To fixed income nerds, that means something, but to the rest of us, it really means that the Fed is finding other ways to pump money into the banking system.  Discussions between the US and China ended last week on a sour note leaving traders searching for some positives.  Vice Premier Liu is still scheduled to come to the US in the second week of October, but a lot can happen in three weeks.  On WeWork, its board of directors is scheduled to meet today to discuss plans to force its CEO to step down or minimize his executive responsibility.  As one might guess, the board is mad (putting it lightly).  They witnessed the company lose 2/3 of its value in a matter of days.  Further, it will lose access to a critical credit facility if they cannot bring the company public before year end.  Finally, WHILE YOU SLEPT, Thomas Cook, the British travel agency, abruptly announced that it is going out of business leaving 150,000 UK travelers stranded abroad.  They were struggling under a mountain of debt and they have claimed that Brexit uncertainty has caused less booking, pushing the company into insolvency.  Lots to chew on, but we’ll get through it together.

 

2.  QE4??  Last week’s repo thing just won’t go away, will it.  To remind you what that “repo thing” is, it involved the Federal Reserve purchasing securities in the open market in order to pump cash into the overnight lending market.  Why they did it was because overnight rates shot through the roof as banks were caught with little liquidity while corporate taxes were being paid and demand for repo financing jumped in response to record bond issuance.  Though it should not be viewed as a bad thing, as it is normal that the Fed does this.  They just haven’t had to do it in a long time… actually since 2008.  That aside, the Fed’s repos were not a one-time event as they continued to conduct repos all week and will now continue to conduct them on a regular basis.  The Fed Chairman hinted at this by mentioning that the Fed balance sheet would need to grow.  This all means that the Fed is now pumping money into the system.  Though utilizing repo facilities is somewhat obscure to most investors, it can be viewed as the Fed’s buying bonds.  Not unlike quantitative easing QE1, QE2, and QE3, which ended in October of 2014.  Demand for liquidity is high as record amounts of bonds, both corporate and treasury, continue to flood the market and Fed repos will fuel the supply of funds.  No matter what the reason, these ongoing repos are monetary stimulus.  “A rose by any other name would smell as sweet.”  Pay attention to the Fed this week.  We have lots of speakers, more repos, and some bill auctions.

 

 

THE MARKETS

 

Friday was a hectic day for stocks as they swung from black to red in the wake of what appeared to be a breakdown in trade negotiations between the US and China.  The S&P500 dropped by -0.49%, the Dow Jones Industrial Average slipped by -0.59%, the Russell 2000 traded off by -0.11%, and the NASDAQ Composite Index fell by -0.8%.  Bonds advanced, and 10-year treasury yields slipped by -6 basis points to 1.72%.

 

WHAT’S NXT

 

– The Chicago Fed will release its National Activity Index, which is expected to have slipped by -0.3% compared to last month’s drop of -0.36%.

– Markit US Manufacturing PMI is expected to be 50.4 up slightly from last month’s 50.3.  US Services PMI is expected to be 51.4 up from last month’s 50.7.

– New York Fed President John Williams, San Francisco Fed’s Mary Daly, and St. Louis Fed Chief James Bullard will all speak today.

– The treasury will auction 3 and 6 month bills and traders will be watching these, as they are closely tied to the overnight lending market.

– The UN General Assembly will begin today in New York.

– Later this week we will get more regional Fed activity indices, housing price indices, Conference Board’s Consumer Confidence, New Home Sales, GDP, Personal Consumption, Durable Goods Orders, the PCE Deflator, and University of Michigan Sentiment.  We will also have lots of Fed speakers in the week ahead.  Please refer to the attached economic and earnings calendars for details.

daily chartbook 2019-09-23

earnings releases 9_23

econ numbers 9_23