“…remember it is just the NEXT headline that can change the tone dramatically…”
BREAKING NEWS – FLASHING HEADLINES
“The Iranians are STANDING DOWN”
“No Americans were harmed in the Tuesday night attack by the Iranians”
“The US will immediately impose additional punishing economic sanctions on the Iranian regime”
And the one that sent Nancy Pelosi and the Democrats over the edge?
“Trump’s Soleimani Strikes Pays Off for now After Iran Backs Away”
This Bloomberg article goes onto say that “Trump took the biggest risk of his presidency by killing a top Iranian general and for the moment the bet is paying off.” The retaliatory strike, that did not cause any casualties, then allowed Trump to walk back from the edge allowing both sides to “save face” and call for a truce, avoiding any deeper military conflict in a region that is in a constant state of angst. Trump even went so far as to say that the US would be open to negotiation with the Islamic Republic and:
“We must all work together toward making a deal with Iran that makes the world a safer and more peaceful place…”
The markets loved it. The algos shifted into overdrive taking the Dow up 161 points, the S&P up 16 points, the Nasdaq surged by 60 points and the Russell added 5 points. This is only part of the story. Recall that on Tuesday evening at 5:30 pm when the news of the strike hit the tape, US futures collapsed, with the Dow losing some 400 points in the moments after. S&P, Nasdaq and Russell all followed suit, and why?
Because the “smart algos” that operate on headlines took those headlines and interpreted what they are programmed to “think they mean” — words like missiles, launch, strike, US bases, US personnel, 15, light up the night sky — when used in the same sentence are by most accounts negative. That causes the smart logic algos to hit the PANIC button and sell stocks randomly and haphazardly. But it also causes the same algos to cancel any inline interest, leaving a VOID in prices and causing a vacuum in demand, leaving no other choice than for the markets to collapse (as we saw) causing untold financial damage, for what?
So here is the rub: They reacted to the headlines BEFORE the results were in, thinking that they are smart. So here is my question: If you had money with an asset manager that relies on an algo to make decisions on investments and you SOLD stock down 400 points in the after-hours session only to see the market — in the regular trading session the next day — not only NOT sell off but surge higher, you gotta be a bit pissed off, no? I mean, just think about it for one minute. You sold stock in a limited trading session down 400 pts on the Dow or down 45 pts on the S&P or down 158 pts on the Nasdaq because the algo made a decision and then when the news story hits the tape and it isn’t what it seemed those same algo’s run in and buy back all of the stock they sold 10 hours ago at lower prices only to pay higher prices because the story changed. Tell me – where is the logic in that?
In any event, as the day unfolded and the news revealed “no casualties” and very little real damage, the world breathed a sigh of relief. That caused stocks to soar, while it caused Oil, Gold and Treasuries to sell off!
Oil, which had traded as high as $65.65 in early morning trading ended the day at $59.61, a $6 or 9% swing from high to low! This is all because any fear of supply disruption or escalation of war is now off the table, allowing the pendulum, that always swings too far to the left and then too far to the right, to come back to the middle. This morning we are seeing oil trade right in line at $59.65/barrel.
Gold, which has shot higher in the past week, traded as high as $1613/oz. yesterday only to close at $1560/oz. or a $53 swing from high to low. Investors bought it for the safety trade and unwound the position after the news of playing “nicey nice” hit the tape, allowing cooler heads to prevail. This morning gold is off another $14 at $1546/oz. in what appears to be a move back into the $1500/$1525 range.
10-year Treasuries, which had surged over the past couple of days sending yields down to 1.77%, finished the day yesterday with yields at 1.86% as money moved out of bonds and back into equities.
This morning in more good news, Beijing has confirmed that Chinese Trade Negotiator Liu He will travel to DC on January 13th-15th to sign Phase One of the trade deal. While Donny had already told us that, today’s story was the first time that Beijing confirmed the details.
So as the trading day ended here in the states, the positive sentiment blew out over the Pacific and ignited a rally in Asia, across the region. That saw those markets surge as the geo-political tensions eased (for now).
By the end of the day, Japan was up 2.3%, Hong Kong +1.68%, China +1.27% and ASX +0.83%. In addition, the South Korean Kospi Index surged by 1.6%, Taiwan was up 1.3%, and the BSE Sensex Index (Bombay India) added 1.34%.
As the sun rises in Europe, we are seeing the surge continue. Stocks advance as tensions in the Middle-East cool. But in European politics, European Commission President Ursula von der Leyen tells the “Hollywood Foreign Press” that the UK will find it virtually impossible to negotiate all the aspects of any future relationship with the EU by December 2020. She also said that any future relationship “cannot and will not be the same as before.” While that all seems a bit dramatic, it is not news. Look, the UK wants a divorce. It’s NEVER the same after that. Get over it!
In early trading the FTSE is +0.36%, CAC 40 + 0.60%, DAX + 1.31%, EUROSTOXX +0.82%, SPAIN +0.38% and ITALY +0.8%.
US futures are up this morning as the focus will now turn back to economic data and company fundamentals. Dow futures are +100 points, S&P’s +12, Nasdaq + 46 and the Russell is +6 points.
The next really big clue on the health of the US economy will be on Friday, with the release of the monthly NFP (Non-Farm Payroll) report. If yesterday’s ADP employment report is any indication, then we can expect the NFP report to be strong. Expectations call for +160k new jobs, but the whisper number is higher, and begins with a two, so stay tuned. Unemployment is expected to hold steady at 3.5% and average hourly earnings are expected to be +0.3% month/month or 3.1% year/year.
We will also hear from a number of FED officials today: Vice Chair Dicky Clarida, NY’s Johnny Williams, St Louis’s Jimmy Bullard and “the Windy City’s” own Charlie Evans, are all due to take to the podium somewhere in the country. While its “fun” to listen to them, don’t expect any bombshell announcements. The economy if just fine, low inflation, low interest rates, and a growing US economy!
The S&P has now tested 3200 and found support and has rallied back strongly. Last night’s close at 3253 brings us right back to where we were before “the event.” With much of that now behind us, investors will focus on the data. What is clear is that long term investors appear to be taking it all in stride and are not shy about putting money to work in a nervous market, taking advantage of mispricing due to mindless algorithmic behavior and headline driven action. While the risk has subsided a bit, it has not really gone away. Stay awake…
The rest of the month is chock full of “experiences…”
Earnings to start next week, Phase One of the trade deal to be signed next week, BREXIT is only weeks away now. Davos is to begin on January 21st – 24th. This year, this annual boondoggle held in Davos, Switzerland will explore content across seven themes:
Fairer Economics, Saving the Planet (Climate Change), Healthy Futures (global healthcare), Tech and how disruption threatens the very definition of what it is to be human, Better Business (think ESG initiatives), The Future of Work, and Beyond Geopolitics. As this event kicks off, expect to hear from all of the CEOs and heads of state and central bankers that attend.
Take good care
Roasted Cauliflower Soup
On this very cold winter day here in the northeast – try the Roasted Cauliflower Soup…
For this you need:
1 Large Head of Cauliflower, Olive Oil, S&P, Minced Garlic, Chopped Onion, Chicken Broth, Light Cream.
And to top it off:
Chopped Pancetta, plain croutons, Fresh Parsley
Preheat oven to 425 degrees.
Toss the cauliflower with olive oil and season with s&p.
Spread the cauliflower onto a baking sheet, and roast for 30 to 35 minutes, stirring occasionally, until lightly golden brown and tender.
While the cauliflower is cooking, put a splash of olive oil in a pot and cook the pancetta over medium heat until lightly browned, about 4 minutes.
Add the croutons stirring to mix with the oil and pancetta. Season with s&p, toss with the parsley, remove and set aside.
Now in the same pan sauté the onions and garlic over medium low heat until soft, about 5 minutes. Add the chicken broth to the onions and bring to a boil.
Add the roasted cauliflower to the pan, and reduce to a simmer for 20 minutes.
Taste, and adjust salt and pepper as needed.
Add the light cream to the pot and then puree (in batches) in a blender or food processor until smooth and creamy.
Return the soup to the pot and keep warm.
When serving – ladle soup into bowls and top with a couple of tablespoons of the garnish.