G-7 stays put – the 8:30 am announcement that had them “watching” the global economy was not what the markets really wanted to hear causing the markets to flip flop in pre-market trading, going from positive to negative to positive as the market tried to decipher what the real message was. Then the FED – in a fairly dramatic way (think EMERGENCY), surprised the markets and announced a 50 BPS CUT (that was a 33% cut) in rates as an insurance contract against the unrest the virus was sure to create. So here is what I need to understand. Sunday evening – Goldman ran with that piece that announced “in their opinion” the FED needed to call an emergency meeting this week – and announce a 50 bps cut in rates with another 50 bps cut in rates by year end. Hmmmmm
How may former GS alumni work in the administration? How many conversations did Stevey (Mnuchin– former GS) have with his buds at GS? How many conversations did Stevey have with members of the FED? How many members of the FED are former Goldman Sachs employees? I mean – how coincidental is it that Goldman suggested that the Fed should call an emergency meeting (check) and then cut rates by not 25 bps, but by 50 bps (check)? I mean they nailed it… right? On Sunday – they told the world what the FED was going to do on Tuesday – how uncanny!
This is what I said yesterday:
“I’ll say it again – I think an emergency rate cut is a mistake (but who am I?) And again – I ask – what is a rate cut really going to do? Think about it, other than maybe a temporary psychological boost – what is it really going to do? Nothing.”
Well, I guess it did NOT create any psychological boost at all – but it did create psychological nightmare and it now put the MARKET in charge of monetary policy. Sadly, the FED neutered themselves yesterday and is now being held hostage by the markets, the President and GS.
Once the Fed made the announcement the market began to back off, treasuries rallied sending the yield on the 10-year plunging – piercing through 1% like a hot knife through “buttah!” 50 bps! What is going on? Before we knew it – the Dow went from +300 to -100 in fairly short order. It then proceeded to try and rally – going positive again until it couldn’t take it any longer. At 11:02 am – it crossed over and went negative – never to see the positive side of the ledger again for the rest of the day. The S&P, Nasdaq and Russell followed in the seconds immediately after, never to see the light of day again. Before you knew it – the Dow was well on its way to shedding 1,000 pts, with the others in tow. So much for calming the markets!
All the while – the treasury market lit itself on fire. Investors piled into that asset driving prices up and yields down. I mean, 10 year yields went as low as 0.906% – that is NOT a typo. This is NOT what the FED expected to happen. Now here is the only other explanation for this drastic (almost panic driven) move. Does the FED or the Federal Government know something we don’t know? Could they be getting out in front of this because they see something “big” coming down the tracks? I mean what else would really explain such a drastic move because the FED has typically made such drastic moves when the economic outlook is dark, very dark – like in 2008 when we were circling the drain. I don’t think we are “circling the drain” at all this time around. Have recession risks risen? Maybe, but I doubt it. The risk of recession is always on the back burner. Remember last August when the yield curve inverted for all of 10 minutes – How many analysts started screaming about the coming recession causing an immediate 7% selloff in the market? How’d that work out? (A: No recession).
By the end of the day – there was plenty of commentary about what the FED did, why they did it, was it really about an economic slowdown or was it because the market threw a hissy fit last week. And there were plenty of opinions! In the end – it is what it is and the algos expressed their displeasure that the FED was NOT more accommodative but March 18th is coming. As the closing bell rang – the Dow gave up 785 pts or 3%, the S&P gave up 85 pts or 2.8%, the Nasdaq lost 268 pts or 3% and the Russell fell 32 pts or 2.1%.
And then the other issue concerning the markets was Super Tuesday. With Petey and Amy out of the picture – that left four somewhat viable candidates: Joey, Bernie (the two strongest) and Mikey and Lizzy (the two weakest). Would Joey rise from the “dead?” Well, with a little help from the leadership and Barack and maybe Clinton and Carter as well. Petey and Amy gave up on their dream (in trade for a possible cabinet or VP positon) and threw their support behind Joey – leaving the country to wonder- What would the voters say? We would soon find out…
And yes – Joey did rise from the dead. Super Tuesday was very good to Joey (and the country) as it becomes clear that Lizzy is out, Mikey should be out, and Bernie has hit a wall. Progressives in congress (you know who they are) taking shots at Warren for not suspending her candidacy and consolidating around Bernie ahead of Super Tuesday costing him the sweep that they all predicted.
Overnight – stocks in Asia were mixed, but not a disaster. the Caixin/Markit Survey revealed that China’s services sector is on life support – falling to 26.5 from 51.8 in January. (No one should be surprised at all). And Australia’s economy did much better than expected in the final quarter of 2019 growing by 0.5% vs. the expected 0.3% while many economists expect the March quarter to be negative. South Korea’s Kospi Index rose 2.2% after the government vowed to throw another $9.8 billion at the virus and its economic impact. The FED move not doing much to ignite any passion across the balance of the region.
Japan +0.08%, Hong Kong -0.24%, China +0.58% and ASX -1.7%
In Europe – markets there are all higher and are reacting to the latest FED move and I’m sure to Joey’s win. I mean even the Europeans don’t want to see a Bernie presidency. Think of what just happened in the UK – between Boris and Jeremy. Boris is more like Biden and Jeremy was more like Bernie and Jeremy (and many of his supporters) got their heads handed to them in their election in December! Next week – we will hear from the ECB and the BoE – will they follow suit and slash rates there as well?
FTSE +1.34%, CAC 40 +1.33%, DAX +1.07%, EUROSTOXX +1.17%, SPAIN +1.0% and ITALY +0.96%
US Futures are surging this morning, suggesting a Biden Pop as the analysis continues. Remember – Investors feel much more comfortable with Biden and his moderate/middle of the road profile. The far left leaning Sanders and Warren were “party poopers” all along – so the markets appear to be a bit relieved. Expect to see many of the industries that came under pressure to rally today as the prospect of a Sanders nomination fades and a Warren run stalls. Healthcare, Energy, Insurance, Tech. At 5 am – Dow futures are up 550 pts, S&Ps are up 60 pts, Nasdaq taking back 180 pts and the Russell up by 25 pts. My sense is that we will see another big surge today…as the focus turns from the virus to the voters.
OIL – which has been all over the place lately is up today, rising 39 cents at $47.58/barrel as OPEC and Russia consider the extent of the next set of cuts aimed at offsetting the fall in demand due to the effects of the virus. News that they want to cut by an additional 1 million/barrels/day on top of the already 2.1 million/barrels/day, is all the rage. The ultimate decision to be made by the Saudis and Russia. I still expect to see oil move back into the $50/$55 range.
Stick to the plan… This too shall pass.
Take good care.
Tito’s Martini – (just in case your head is spinning)
For this you need: Tito’s Vodka, Dry Vermouth, Blue Cheese Stuffed Olives, Olive juice and Ice.
Here is how you order it at any Capital Grill:
“I would like a Tito’s martini on the rocks, shaken not stirred, a little “dirty” with 3 (not 2) blue cheese stuffed olives. And a glass of ice water on the side.”