[Chart courtesy of MarketWatch.com]

1. Moving the markets

Early aimless meandering turned into a modest rally mid-day, but positive momentum faded in the end with the major indexes diving into the close with nothing to show for.

It came as no surprise that defensive sectors, such as consumer staples, led for most of the day, as the ‘weaker growth’ meme was present. This became abundantly clear as manufacturing data in the Eurozone contracted sharply in September and notching its worst reading in almost 7 years.

The data was simply awful for Germany, which is seen by many as Europe’s economic engine, but a report indicated that business conditions continue to deteriorate with the no end in sight. This obviously was known to the ECB when the lowered interest rates again last week. Things indeed look bleak for the Eurozone when their historically best performer and exporter is mired in what appears to be a recession.  

And it’s not just Europe that is showing poor numbers, we also learned that powerhouse South Korea saw its exports collapse the most since 2009. Overall, it was the worst global data disappointment day since May and pushed the index back into contraction.

There was no short squeeze today, as the most shorted stocks did what they’re supposed to—namely head south, which they did for the 5^th day in a row.

Since the indexes are within striking distance of hitting new all-time highs, we need a better driver to accomplish this than constantly worsening global economic data.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

Yesterday’s “feel good” closing ramp carried over into today’s opening, as the major indexes were getting close to test new record highs. Better-than-expected housing and manufacturing data contribute to the bullish sentiment.

While the S&P 500 is within 1% of its record closing high, it may not get there until next week due to tomorrow’s quadruple witching day for the US markets. That means volatility may spike as a result of the simultaneous quarterly expiration of futures, options on indexes and stocks.

Yesterday, I mentioned the liquidity crunch in the overnight lending market. It continued today with the Fed promising billions of dollars to “support” the system from blowing out of control. The liquidity shortfall rose by almost $4 billion compared to Wednesday morning. Ouch!

We saw some fallout of that, as the markets skidded, assisted by odds of a China trade deal slipping, with news hitting the headlines that the White House favors increasing some tariffs to possibly 50% or even 100%. That took the starch out of upward momentum, and we ended up just about unchanged.

Traders are still digesting the Fed’s rate cut, and we may not see any attempt to break through to all-time highs until next week, although that July 2019 high may very well serve as overhead resistance.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

As expected, the Fed delivered the goods and cut rates by 0.25%; but stocks sold off. The reason was that the accompanying language in its statement and economic projections cast doubt not only on another rate cut this year but also in 2020. That was a disappointment for traders, who had firmly believed that at least one more reduction prior to December 11 was a sure thing.

However, the sell-off was mild, and we saw another last hour pump to get the indexes to a green close, which worked except for the Nasdaq. In the end, not much was lost or gained, as we ended up hugging the unchanged line.

What was not addressed was the liquidity crunch in the overnight lending market, where the Fed had to step in and provide some $75 billion in liquidity as the Secured Overnight Financing Index (SOFI) spiked to 5.25% from 2.25%. This was the Fed’s first intervention in over 10 years.

These are complicated repo transactions, which can have a dire effect on equities but have not been reported by MSM. If this topic interests you, you can read more here and here. I am merely pointing this out as a fact that has been conveniently ignored by the markets but may come back to haunt them.

The last hour rebound was a function of Fed head Powell promising more Quantitative Easing (QE) by disguising his words like this:

“It is certainly a possibility that we’ll need to resume the organic growth of the balance sheet sooner than we thought.”

What that means is that QE is on its way, at some point, but stocks managed to joyfully jump into the close with the S&P 500 reclaiming its recently lost 3k milestone marker.

The Fed did exactly what was expected, but it remains to be seen if this will be enough for equities to continue climbing the mountain towards new all-time highs.