1. Moving the markets

The markets continued their bullish ways into a new week with the supporting actor being the upbeat mood caused by last week’s preliminary trade deal between the US and China.

Despite of all the hysteria, many questions remain over the details of the much-hyped “phase one” accord. The Chinese were pleased, because it included a partial rollback of some tariffs and the ditching of further duties on imports.

If we can believe US trade representative Lighthizer, then the phase one deal is “totally done” and goes beyond agriculture and addresses intellectual property issues, financial services and their respective enforcement provisions.

Still, come contentious issues will need to be resolved, but that would be done in the “phase two” talks, which still must be scheduled. The “phase one” deal is supposed to be signed in January.  

Bond yields continued their roller coaster ride by jumping 5.3 basis points to end the day at 1.88%, but equities were in a world of their own but, while coming off their early highs, still managed to score solid gains.

Supporting the bullish trend was another giant short squeeze, which crushed any remaining bearish sentiment that may have been waiting in the wings. Short squeezes have been a major support tool designed to keep the upbeat mood alive.

But in the end, the powerbroker to drive this market has been central bank liquidity, as this chart demonstrates. Without it, we would be celebrating the upcoming holiday with considerably lower index levels.

1. Moving the markets

It’s amazing what little it takes to send the computer algos on a bullish run and in the process pushing the major indexes into record territory.

Trump’s announcement that “a big deal” with China is “getting very close” and “they want it, and so do we” were the magic words that ramped equities into uncharted territory. Traders assumed that also meant that the fresh tariffs scheduled to go in effect on Sunday may be avoided.

Then another report confirmed that the US team is indeed offering to cancel the new tariffs and reduce existing levies on Chinese goods by up to 50% on $360 billion worth of imports.

One analyst did not see any meat on that bone for the U.S. and summed it up like this:

So, what does Trump get in return for folding like a cheap chair? Why pledges to buy more agricultural products, pledges which apparently are not even enforceable as they are merely “firm commitments”, in other words taking China for its word.

Of course, we’ve heard all of this before, as one analyst succinctly tweeted. There is no doubt that eventually a deal be struck, but will it be this time or is this simply another attempt to positively influence the markets?

Mid-day, some questionable news from the Chinese took the starch out of upward momentum, but the major indexes recovered from the pullback, as words that “a trade deal in principle” had been reached, seemed to calm things down, and we closed solidly in the green.

Bondholders got punished today, as yields rocketed higher with the 30-year soaring the most in 3 months, while the 10-year rose 9.3 basis points to close at 1.89%.

Looking at the big picture in the markets and considering the worsening repo issues (overnight lending), the possibility of QE4 from the Fed and the ever entertaining and ongoing trade saga with China, it promises to be an interesting last 2 weeks of 2019.

1. Moving the markets

As expected, the Fed left interest rates on hold but indicated that they have no plans for any changes through the end of 2020. In fact, the assessment of the economy was more upbeat, which caused market sentiment to remain cautious.

Powell reiterated that the “current stance of monetary policy is appropriate” to sustain an economic expansion, strong labor markets and inflation near its 2% target. In other words, he considers the “policy somewhat accommodative,” which gave markets a boost that assured a green close.

During his speech, Powell was pressed on the issues in the overnight funding markets, to which he admitted that “if its does become appropriate to buy something other than T-Bills, the Fed will do so.”

The reference was to the Fed’s current monthly $60 billion in purchase of T-Bills, which had been called “non-QE.” He has now opened the spigot to purchase other assets as well, such as longer-term bonds. At that point the objective is clear in that this will be for sure QE4, or an outright monetization of debt.

The US dollar sold off sharply and slumped to 5-month lows, while the 10-year bond yield dropped to close a tad below the 1.80% level.  

All eyes are now on the Fed and when it will enact the new QE4, which can easily be caused by accelerating year-end problems in the overnight lending markets, where the underlying financial plumbing issues continue to deteriorate. From my understanding, some of these must be addressed and fixed prior to year-end.

I will be watching closely for any fallout that might occur.