Thursday, August 8, 2019

The Morning Call--Are Markets losing faith in the central banks?

The Morning Call


The Market
The Averages (26007, 2883) made a huge intraday rebound from a 500+ Dow point selloff in early trading to close mixed for the day (Dow down, S&P up).  Volume was down again and while the equities are oversold, breadth was not good.

The Dow closed back above its 100 DMA, voiding Monday’s break (remaining support); however, the S&P ended below its MA for a third day, reverting to resistance Both indices remained above their 200 DMA’s and their Monday gap down opens still need to be filled.

The VIX was down 3 ¼%.  It remained above both MA’s (now support).  Let’s see if these challenges are a harbinger of similar behavior of stocks.

The long bond advanced fractionally on huge volume, finishing above both MA’s and in uptrends across all timeframes.  However, it experienced a gap up open on Monday which needs to be closed.

The dollar was down slightly, but remains in short and long term uptrends and above both MA’s.  Like stocks, it had a gap down open which needs to be filled.  However, it did close below the upper boundary of its former long term trading range for a third day---which is a bit worrisome as it raises the odds that Friday’s breakout could prove false.  Follow through.

Gold jumped another 1 ½ % on monster volume, ending within very short term and short term uptrends and above both MA’s.  However, it still has last Friday’s gap up open which needs to be closed.

            Bottom line: the Averages are in uptrends across all timeframes and have those gap up opens that need to be closed.  I mentioned yesterday what is selling climax looks like, i.e. early big selloff and then a strong bounce.  Tuesday didn’t fit that pattern so I thought that there could be more downside.  However, yesterday’s pin action did fit.  So, a short term recovery wouldn’t surprise me.  The question is how the indices handle those gap down opens.  Patience.

                 The  major argument against any kind of rally is that the long bond, the dollar and gold are all pointing at the need for a safety trade.

            Wednesday in the charts.



            Two minor indicators were reported yesterday: weekly mortgage applications rose but the more important purchase applications fell; consumer credit jumped in June but not as much as anticipated.

            JP Morgan raises odds of a recession, but it is still below 50%.

            Overseas, there was one datapoint released: June German industrial production fell much more than expected.

            Aside from the narrative on yesterday’s volatility, investors remained focused on the trade/currency war with interest rate cuts by the central banks of New Zealand, India and Thailand inflaming the issue of a potential global race toward competitive rate cuts/currency devaluations---which is becoming a front line issue for the Markets. 

The risks of a currency war.

            What could Trump do to weaken the dollar?

To be sure, those central banks had plenty of justification for this action, i.e.  the impact that slowing of global economic growth could have on their respective economies.  As you know, the overseas data in the last six months has not been great.  And a deteriorating global trade environment will likely only make matters worse.   

            But the issue that investors are starting to consider is, are central banks lowering rates because they are worried about global growth or are they just responding to Markets’ concern about global growth?  The distinction is important because the answer defines who is controlling interest rates. 

And that is much more important consideration for the longer term than just whether the central bank of New Zealand lowered its official lending rate yesterday.  Because (1) if the central banks are the determining factor, then an interest rate cut will help the global economy but (2) if the Markets have taken over, then central bank monetary policy becomes much less relevant.  In other words, if the Markets have already begun discounting a global recession [i.e. lowering interest rates], then there is much less reason to watch or respond to foreign central bank rate cuts.

***overnight, China weakened the yuan, but not as much as traders expected.

Bottom line: the potential problem for our equity Market is that if a general loss of faith in central banks’ ability to manage their respective economies finds its way to the Fed, then the whole Fed/Market codependency is in danger of unravelling. To be clear, I am not saying that (1) the loss of faith has occurred [though it may be occurring], or (2) the US economy is slowing to the extent of many other countries.  But the risk is increasing that investors’ glorified perception of the Fed is becoming more tenuous. 

            Easy money won’t work anymore.

            Dividends by the numbers in July.

            Is volatility a fee or a fine?

    News on Stocks in Our Portfolios
General Dynamics (NYSE:GD) declares $1.02/share quarterly dividend , in line with previous.

Automatic Data Processing (NASDAQ:ADP) declares $0.79/share quarterly dividend, in line with previous.


   This Week’s Data


            June consumer credit rose $14.6 billion versus projections of $16 billion.

                        Weekly jobless claims fell 8,000 versus estimates of down 2,000.


            The July China trade balance came in at $45 billion versus forecasts of $40 billion.


            Why are interest rates negative? 

What I am reading today

            Mental illness and mass murder.

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