1. Moving the markets

While the earnings season continues, traders were more concerned with what the Fed will decide regarding interest rates, when it concludes its two-day meeting on Wednesday. Will they deliver another hoped for sugar high for the economy and the markets, or will the outcome be a dud?

A 0.25% reduction in rates has been baked in the cake, and any disappointment there would have negative consequences for equities. However, even if they meet this low end of expectations, and not reduce by the desired 0.5% whisper number, discontent may spread anyway, and we could witness a sell-off after the recent relentless move higher.

After all, eventually, investors and trades will wake up to the fact that lower rates are a sign of declining economic activity and not an indication that all is well. Rising rates represent an economy firing on all cylinders, a condition that therefore needs to be reigned in due to the possibility of inflation getting out of hand.

We will find out in a couple of days what the reaction will be and if traders will sell the Fed news. In the meantime, the markets will likely limp along directionless, as they did today.  

1. Moving the markets

There was not much upward momentum to be found in the equities markets, as Europe set the negative tone early on with all indicators sliding into the red. The major indexes followed suit and never came close to breaking above their respective unchanged lines.

The retreat came in the face of a busy earnings day, which featured mainly disappointments, which weighed heavy on sentiment despite prospective interest rate cuts from the ECB.

The Nasdaq was hardest hit after Tesla (-15%) failed to meet expectations, which dragged tech-related stocks down with it. Others that did not fare well included Facebook, Boeing and Ford.  

Even those companies that reported better than expected earnings seem to be affecting traders’ mood negatively, as they are hesitant to raise guidance and are lowering second half estimates due to the disruption experienced by current trade policies.

Bond yields rose today with the 10-year gaining some 2.7 basis points to close at 2.08%. If that sounds ridiculously low to you, take a look at the other side of the Atlantic where the German 10-year bond now has crashed to record lows to -0.41% before rebounding into the close.

At its lowest point, it means you can expect to lose -0.41% every year for 10 years on your investment, when at least in the U.S. you will earn +2.08% per annum. If you think this is simply nuts, you are correct. It’s nothing but financial engineering at its finest.

1. Moving the markets

Aimless meandering best describes today’s early part of the session, during which the major indexes, except for the Dow, hovered around their respective unchanged lines. A sudden mid-day pump not only pushed the two indexes into the green but also to a new record close. The Dow was weighed down, as poor profit reports by component members Caterpillar and Boeing kept the index in the red all day long.

The Nasdaq held up surprisingly well, despite the Justice Department launching a broad anti-trust investigation into the big tech companies (FANG names). Depending on the extent, this action could eventually cause this rally to stagger.

On the economic front, we learned that New Home Sales missed expectations (646k vs. 658k) despite a collapse in mortgage rates, which did not bring back an onslaught of buyers. Adding insult to injury, the purchases for March, April and May were all revised lower. However, YoY new-home sales rebounded.

Manufacturing hit the skids again, not just here in the U.S. but also in Europe and Japan, while the domestic service sector beat expectations. As one analyst pointed out, this simply means “we have a two-speed economy with a steady service sector growth masking a deepening downturn in the manufacturing sector.”

I see two conflicts righty now affecting the markets. One, central banks are about to embark on more easing, yet on the other hand, the slowdown of growth on a global scale, along with some geopolitical factors, is weighing on traders’ minds. Can more central bank intervention really extend this already overextended business cycle?

I guess we’ll have to wait and find out.