A Different Story

A different story.  Yesterday, for the first time in quite a while, markets were not focused on trade woes, instead rallying on strong earnings.  Positive signs emerged from Brexit discussions, adding to the market’s jubilance.

 

MY TWO CENTS

 

1.  On the banks.  Third quarter earnings season officially kicked off yesterday with the big banks and there was quite a bit to digest.  The most notable nuance was no mention of trade wars or tariffs as the sector is less susceptible than others to global trade.  It was nice to spend a whole day not hearing about the trade war.  What we did hear about instead were low interest rates, high regulatory barriers, and fallen unicorns.  As expected, interest related earnings have gone down due to low rates and a flattish yield curve.  However the banks managed to rely on other businesses to keep overall earnings increasing.  I have written a great deal on the mysterious repo market, also mentioned in yesterday’s calls,  which has been attracting some mainstream attention lately.  Repo markets don’t directly affect average investors and are generally used by banks, large institutions, and bond traders.  But that does not mean that they are not important.  Repo markets are the underpinning of the financial system allowing money to move around and distribute evenly in the economy.  For example, Company A has a large amount of cash sitting around as a result of accumulated revenues.  The company would like to earn some interest on that money but it will need it in the days ahead to satisfy obligations.  The company will lend the cash out, usually overnight, to Hedge Fund A.  Hedge Fund X just bought a lot of treasury bonds and would like to borrow money to pay for them.  Hedge Fund X can borrow money from Company A by entering into a repo agreement which involves them putting up the purchased treasury bonds as collateral.  The fund, in essence, will sell the bonds to Company A and agree to “repurchase” them (hence the name repo) at a later date. The hedge fund will pay interest for the loan satisfying Company A’s requirement.  Money therefore, flows to the places where it is needed the most with relative ease.  Until it doesn’t!  Several weeks back overnight repo rates shot up to 10% because the “companies” with cash didn’t have enough to satisfy the requirements of the “companies” that needed it.  Supply down = prices up.  The Fed had to jump in and inject cash to bring the rates back down.  It is the Fed’s job to ensure liquidity in the short term lending markets and they had to spring into action.  They have since been aggressively adding cash.  In fact, the Fed recently announced that they would not only conduct repos but that they would also purchase as much as $60 billion in treasury bills per month in the open market.  The announcement caused short term rates to go down bringing the inverted 3-month/10-year yield curve back to normal.  Banks approve.  Stock traders view it as monetary stimulus.  All parties are happy… for now.  All reporting banks yesterday beat Wall Street estimates except for Goldman Sachs, who cited losses from investments in the now infamous group of unicorn IPO’s.  Expect to hear more on that.

 

2.  Growing slowly.  In recent months, markets have been struggling with lower expected economic growth.  With lots of mixed signals, traders; outlooks seem to change daily.  That, combined with the ups and downs of the ongoing trade negotiations between the US and China have sent equity markets in a rocky sideways ride for the past 12 months, though they are up for the year.  Yesterday’s strong pre-market earnings releases provided some hope for the future and traders were happy.  Perhaps too happy to notice that the International Monetary Fund came out with their global economic forecast in which it lowered its growth estimate for 2019 from +3.3% to +3.0%.  The reason?  Problems with trade (broken record).  They did however also predict that the global economy would pick up late in 2020 for a growth of +3.4%.  Good news for some, but not all.  According to their forecast the US will slow from +2.4% in 2019 to +2.1% in 2020.  The global pickup will come from developing economies, which are expected to stage a minor comeback in 2020.

 

THE MARKETS

 

Stocks had reason to cheer yesterday, trading up on positive earnings and high hopes for a Brexit deal.  The S&P500 climbed by +1.00%, the Dow Jones Industrial Average advanced by +0.89%, the Russell 2000 traded up by +1.19%, and the NASDAQ Composite Index jumped by +1.24%.  Bonds slipped and 10-year treasury yields climbed by +5 basis points to 1.77%.

 

WHAT’S NXT

 

– WHILE YOU SLEPT news emerged that a Brexit deal may not be as close as we thought yesterday.  Stock futures have traded down in response.

– Retail Sales is expected to show a month over month growth of +0.3% compared to last month’s growth of +0.4%.  This is an important gauge of consumer health.

– The National Association of Home Builders will release its Housing Market Index which is expected to remain unchanged at 68, indicating ongoing favorable conditions for the industry.

– The Fed will release its Beige Book which details economic health in the various Federal Reserve Bank regions.

– Chicago Fed President Charles Evans and Dallas Fed President Robert Kaplan will speak today.  Fed Governor Lael Brainard will speak at a Crypto Currency conference and we can expect comments to have some impact on those markets.

–  Bank of New York and PNC Bank beat earnings this morning.  We will also hear from Bank of America, US Bankcorp, Abbott Labs, and Ally Bank before the session.  After the bell earnings will include Netflix, CSX, Alcoa, United Rentals, Kinder Morgan, and IBM.

daily chartbook 2019-10-16