1. Moving the markets

It sure was a day consisting of mixed reports and, as much as I searched, I could not find a reason that might have supported the early rally. Of course, the latest earnings reports took center stage, but it seemed the disappointing results from McDonalds, Travelers and UPS were overpowering the positive ones.

With the markets failing to break out, after having reached the upper limit of their 3-month trading range, this may change when tech behemoth Amazon releases its results on Thursday. Analysts are looking for “a solid beat” and a subsequent move of the major indexes not just above the current glass ceiling but also into new record-high territory.

With traders’ focus being on a breakout, almost no one talks about far more concerning issues, namely the continued stress, strain and funding squeeze in the overnight lending markets (repos). It’s a very complex issue that boils down to the fact that banks have trouble securing funds due to a shortage in liquidity.

That makes me go hmmm… The Fed announced last week that they will inject funds at a rate of $60 billion per month (but they don’t call it QE) via the purchase of T-Bills, yet today’s repo was oversubscribed 5.5 times. This confirms that participants are scrambling to convert their “safe” assets into dollars as fast as possible, as ZH explains. That leaves this question:

Why are banks still so desperate for liquidity even though the Fed has now made clear the Fed’s balance sheet will expand to accommodate all reserve needs, and why do they so stubbornly refuse to approach the interbank market for their funding needs?

In short, what do they know about the banking system that we don’t?

This monetary crunch, if it continues, may very well get exponentially worse, at which time, there will be no way that the sleepy equity bulls will not have a very rude awakening.

The “smart money” may have already woken up to that fact, if this chart from Bloomberg is any indication.

1. Moving the markets

The major indexes edged higher early on, as the S&P500 fought hard to reclaim its 3,000-milestone marker. The index fluctuated all day slightly around that level but ended up slightly below it.

Helping the bullish enthusiasm were news of a potential Brexit deal, which turned out to be more of a rumor than a fact. Keep in mind that any new agreement still would need to be ratified by the British PM and the U.K. Parliament.

Economically speaking, the news provided a continued mixed picture, as Soft Survey data have completely decoupled from stock market levels, while the US Macro Surprise Index did an about face, causing ZH to quip “use it or lose it.”

Industrial Production hit the skids and, on a YoY basis, shrunk for the first time since Trump’s election in November of 2016.

As I pointed out before, the US is not an island and, unless there is progress in global trade disputes, domestic econ data will hit the skids even more, which eventually will affect the direction of equities. Same trade disputes may impinge on earnings as well, just as last month, when bellwether FedEx cut its profit outlook in part due to trade and economic circumstances.

Given that, it’s almost a certainty that not only the Fed, but also other Central Banks (CBs) as well, will endorse more rate cuts in coming months to combat economic weakness. And that is exactly the fly in the ointment: Rates are already so low that CBs don’t have much room to act and put a bottom under equities. That means, eventually, bad economic news will be bad news for stocks.

From a technical point of view, a breakout above the September highs and then above the July all-time highs could, against all fundamental odds, bring a resumption of the bull market back into play. These days, anything is possible, meaning that we need to be prepared to deal with the unexpected.