Welcome to What’s Happening Now.
Last week was heavy on market breaking news, namely on tariff negotiations, Brexit, and a missile attack on an Iranian tanker.
Today, Columbus Day, is often an odd day in the markets with bond markets closed so stock trading may be muted, even though the global economy continues to flash warning signs above your money.
China Deal or Big Yawn?
We’ll start with what didn’t happen last week – no BIG deal with China.
The markets were anticipating (hoping for) a more significant White House deal with China – one that by its largess would sustain our recently rising stock market, along with traditionally allocated portfolios.
That didn’t happen. By day’s end on Friday, markets retreated close to where they opened – as if robotic trading programs did all the buying only to then dump stocks in the last half hour of trading into the close:
The headlines announced that a deal had been reached. That’s supposed to be good news, which means stocks are supposed to go up, not down. But it soon became clear that only a “partial” deal was reached with China, a fact that was well communicated.
Hence one reason for the drop at the end of the session: The anticipated upgrade to a “substantial deal” may have been over-hopeful.
There was, in fact, nothing announced that looks like it could turn up the dial on growth. And even today, China is already walking back on last week’s “deal,” wanting more talks before signing anything.
To me, this is just more Twilight Zone market and investor behavior, which means we continue to expect the unexpected.
As of now, the whole China conclusion remains unconcluded and underwhelming in substance. If stocks gap down and close lower today or Tuesday, when more folks are back in the office, that would be called an “island top” (a single day in the sunshine).
Single days in the sunshine do not a trend make.
Here’s what we think: Failing any sudden policy surprise, the downside risk on China continues to exceed the upside potential. A China-lite mini deal isn’t going to save traditionally invested portfolios. It just isn’t.
More Fed Supported Fog
Here’s what else happened on Friday. The Fed said it will begin buying $60 billion in Treasury bills each month, with maturities ranging from five weeks to a year, for at least through Q2 of 2020 – to improve the Fed’s control over the benchmark rate it uses to guide monetary policy.
To me, the Fed is nervous that the mid-September turmoil could come back around again. So, what’s really going on here?
Basically, we’re just back to buying our own Treasury-issued debt. The fancy lads call that debt monetization; we call it “faking it.”
By the way, I thought that stopped back in late 2014?
But no. Here we go all over again. Powell was very careful to emphasize how such measures are not more QE, or “quantitative easing.”
But it should now come as little surprise that Powell’s words and Powell’s actions are two very different things.
If it looks like a duck, quacks like a duck, and flies like a duck, then it’s a duck.
What we are now seeing looks, quacks, and flies like more QE – which means more “faking it” and less free market capitalism. Again, that’s the new “abnormal” of the modern Twilight Zone.
And if that we’re not enough, we’ve got more than just ducks to think about; black swans are circling as well. Iran’s Islamic Republic News Agency reported an oil tanker was attacked while sailing through the Red Sea near Jeddah, Saudi Arabia.
Did the markets care that war sabers are rattling yet again in the Middle East? Nope. We’re in the Twilight Zone, folks. Nothing is as it should be.
Fortunately, however, there was some good news last week. The U.K. and European Union signaled that a Brexit deal (i.e. an amicable divorce) is in sight. Three days of intensive talks in Brussels are scheduled.
Then again, we’ve seen this movie before. Europe is sliding full bore into a recession and these people still can’t agree, not even for their mutual economic good. Come on. More Twilight Zone.
Besides, a divorce is still a divorce… and deal or no deal, the bottom line is that the Brits want out of the European Union. Things are not very “unified” across the pond.
I’m not trying to be negative, just to be negative, though I can’t blame some of you more bullish readers for wondering. But when I see charts like this… GDP going negative across the globe, it’s hard to smile.
Bloomberg Economics is projecting a slowdown across most economies, including the U.S., China, and Japan, along with a recession for Germany and the U.K.
No country wants to be a leading indicator right now, but they haven’t any choice.
Caution therefore – buying the dips in this Twilight Zone has a low probability of holding up. The S&P 500 Index is perched on a classic technical wedge – i.e. the edge of a narrowing cliff:
On the other hand, every coin toss ends with a winner and a loser, and in Twilight Zone markets where nothing is as it seems and central banks keep otherwise zombie markets alive with cheap debt and active money printers, the old indicators above just aren’t as predictive as before.
That said, even money printers break down, and there’s only so low rates can go before the Twilight Zone simply becomes a dead zone.
If, however, serious progress on China and Brexit do get done in the near term, say by year-end, we could see these markets rip higher, as they are thirsty for good news and seemingly indifferent to bad news.
That is to say, if the worst case scenarios in both trade wars and EU dysfunction quickly vanished, global growth could reverse to the upside, the Fed could back off on easing and, yes, those low yields on U.S. Treasuries could reverse course and begin to rise – but even that would just pose yet another storm.
Rising yields (and hence rising interest rates) on over-indebted corporations and sovereign balance sheets would trigger a bigger problem and make everything all the more uncertain. That’s what happens in the Twilight Zone – uncertainty rises no matter where you look.
Last Week’s Poll
Thanks to all that contributed to last week’s Twilight Zone Poll!
The polled question was, “What bucket do we assign to the notion that a Fed rate cut will somehow rescue the slowdown in hiring, keep folks employed, buoy demand, and therefore growth just in the nick of time? The list choices was horror, science fiction, drama, comedy, superstition, or none of the above bucket?
You voted mostly for science fiction; next for “all of the above” (a category I had left out – thanks, Roland!); then horror and superstition; and lastly drama.
In short: unanimity. We are all in this Twilight Zone together.
And as for this week, Fed speak is back in full gear all week long as the following Fed officials are teed up to speak: St. Louis Fed’s James Bullard; Atlanta Fed’s Raphael Bostic; Kansas City Fed’s Esther George; San Francisco Fed’s Mary Daly; Chicago Fed’s Charles Evans; Dallas Fed’s Robert Kaplan; New York Fed’s John Williams, to name most.
The annual meetings of the World Bank and the IMF kick off tomorrow in Washington and will feature the newly appointed IMF Managing Director Kristalina Georgieva, World Bank President David Malpass, Bridgewater co-chairman Ray Dalio, and Goldman Sachs CEO David Solomon.
The IMF will be presenting its World Economic Outlook. Lately, they’ve been lowering their global growth predictions.
On growth, Bloomberg is projecting 2.2% for Q3 2019 (down from 4.7% at the start of 2018, just six quarters ago). The IMF seems to be on the same track and may therefore lower its own estimates another notch:
That’s what’s happening now. Enjoy the week, stay safe, and stay tuned for my Wednesday report on more reality vs. fiction.
5 responses to “What to Watch Out for On Columbus Day”
October 14 2019