Still see it in my minds eye. The blue sky. So far. If only I could... the waves had become rough. Really rough. At first there's disbelief. I am a strong swimmer. I can handle this. Then, in an instant... reality. This may be it. What if this is how it ends? The surface is now so very far away. My parents. Dad will be strong. Mom will cry. Mom will cry. Mom will cry. Anger. Not today. Not today will Mother cry, you worthless puke, now try again!! Keep going. Almost. Sweet oxygen at last. Getting to shore would be another fight, but that fight had already been mentally won. 0330 Wednesday morning. My office. It's okay now, just need to change my shirt.
Equity markets roared back to life on Tuesday. The S&P 500 gains 2.1%, the Nasdaq Composite took back 2.65%, reaching levels not seen since... last week. This was broad, really broad. On Dasher, On Dancer, On Small Caps, On Transports, Led by Technology, Materials, and yes, the banks, equities rolled on. Everything except the bond proxies that had performed as safe havens as markets had sold off. Not everyday, the banks find relief in the rising probability of a rate cut. On top of possibly preserving economic growth, a cut would with yields out toward the long end of the curve so pressured, would actually serve to improve net interest margins. Odd indeed.
The Environment on Trade
Has the environment really changed all that much? Could sentiment swing from one close to the next morning so favorably? It all came down to words, not action, and that means to me that the waters will not be still, the seas will remain for now, unsettled. Not always a bad thing. There was some optimism around trade, as Mexican Foreign Minister Marcelo Ebrard announced a summit (today) with U.S. Secretary of State Mike Pompeo in an effort to cut of the imposition of tariffs against that nation's exports to the U.S. at the pass. Perhaps, even more important to the markets than an overt attempt by Mexican officials to get in front of these tariffs, was news that these tariffs don't exactly have the support of Senate Republicans. Obviously this is a sticking point that with Democrats in control of the House might require the president to declare a new national emergency in order to move forward.
In addition to news on the Mexican front is that U.S. Treasury Secretary Steven Mnuchin will meet with Yi Gang, Governor of the PBOC at the G-20 summit in Osaka later this month. This will be the first face to face meeting of key players in negotiating a deal between the two nations since a pending deal broke down last month. There remains hope that a meeting can still happen between Presidents Trump and Xi, but even without that, a meeting between two key players is still read as progress by keyword reading algorithms that move markets.
You ever wonder how those at the FOMC must feel about that last rate hike in December? Especially, given that markets were already warning them at that time to take it easy. Especially since that hike came against the outspoken advice of so many financial professionals including this one. Actually, my beef was trying to rapidly increase short-term rates, while implementing a plan to reduce the balance sheet (quantitative tightening). I mean it didn't take an overwhelmingly impressive IQ score to see trouble coming from that direction.
In Tuesday's column, we praised St. Louis Fed President James Bullard for being ahead of the group think at the Fed on policy. It would appear that he now has allies. Important ones. The focus, and the heightened reaction across markets came in response to Jerome Powell, as it should. He is the Chair. He is the leader. Powell acknowledged that escalating tensions over trade might develop as harmful to the domestic economy. That was key. There has to be a publicly stated level of cognizance prior to taking or at least signalling any actions going forward. What Powell said was this... "We do not know how or when these trade issues will be resolved. We are closely monitoring the implications of these developments for the US economic outlook and, as always, we will act as appropriate to sustain the expansion, with a string labor market and inflation near out symmetric 2% objective."
That's a mouthful, and infers quite a lot, however, I think an even stronger statement was made by Fed Governor Richard Clarida later on CNBC. Clarida said in reference to possible slow growth amid low inflation... "As Chair Powell and I and others have indicated we are going to put in place appropriate policy to achieve those goals,. Whether or not that means acting preemptively or when the data comes in is just going to depend on the context at the time."
Key word there folks, is "preemptively." This is all I have ever asked for. A central bank able to think in real time. Anyone can be data dependent. Heck, a moron can do that. It takes a chess player... no, it takes a champion to understand the game at hand, and to think ahead. Can the current FOMC do this? It certainly sounds like at least a few understand that they might need to. Clarida speaks this morning in Chicago. Let's see if he backs up at all from this statement.
A couple of takeaways for investors to be alert to. Trading volume. We focus on this. Wednesday's regular session looked great. At the Nasdaq, winners outnumbered losers by three to one, at the New York, the ratio was nearly five to one. At the New York, advancing volume beat declining volume by eight to one, at the Nasdaq, this ratio was more like 10 to one. All good? Not quite.
Yes, the S&P 500 retook both the 200 day SMA (2775) as well as the 40 week SMA (2766), as did the Nasdaq Composite, just barely. Yes, among growth related Sector SPDR ETFs... Information Technology (XLK) ,and Consumer Discretionary (XLY) defended this 200 day line, as Financials (XLF) , Industrials (XLI) , and Materials (XLB) all have now retaken that line as well. Problem is, for me... that volumes were lower on Tuesday than they were on Monday. Where was the institutional participation that we saw on the downside? Obviously, markets came in badly oversold from a technical perspective. Obviously, algorithms that read keywords in real-time reacted most quickly to optimistic news stories on trade, and dovish sounding commentary by Fed officials. Obviously, there was then at least something of a short-squeeze.
Was this rally meaningful? Certainly. Can markets sell off from here? Of course. The big kids are certainly not all in after bailing out at the lows.
Can markets go higher? Certainly, but we still need to see higher prices form here on higher volumes in order to confirm that those big kids are playing ball. One thing we know for certain... a lot of portfolio managers have been screaming at their risk managers over the last 24 hours. If you've never worked on Wall Street, try to picture pure hatred. Now add the intensity of a thousand burning suns. Yeah, that.
Oh, and the guy who runs U.S. equities, but was conveniently in the gym (cell phone in locker) when these decisions were made wants them both in his office this morning.
Economics (All Times Eastern)
08:15 - ADP Employment Report (May): Expecting 181K, Last 275K.
09:45 - Fed Speaker: Federal Reserve Gov. Richard Clarida.
09:45 - Fed Speaker: Atlanta Fed Pres. Raphael Bostic.
09:45 - Markit Services PMI (May-F): Flashed 50.9.
10:00 - Fed Speaker: Federal Reserve Gov. Michelle Bowman.
10:00 - ISM Non-Manufacturing Index (May): Expecting 55.6, Last 55.5.
10:30 - Oil Inventories (Weekly): Last -282K.
10:30 - Gasoline Stocks (Weekly): Last +2.204M.
14:00 - Beige Book.
Today's Earnings Highlights (Consensus EPS Expectations)