Morning Thoughts: Wednesday March 21st

Please Note:

I will be attending the Benzinga Women’s Wealth Forum in Boston today – yes in the middle of a Nor’Easter – so I will not be managing my trades at my computer for the Portfolio – my trading platform will be! With that, there will be no Trade Alerts from me today but you have my trade setup already with Stop/Profit targets for risk management plus my ideas below – from Macro to Micro.

The Bloomberg Lead In

“It’s Fed day, the Facebook firestorm continues to rage, and short-term funding costs are at crisis levels.” Yup, that about sums it up.

Positioning for Fed Day and Beyond

Since 2015, the Fed Funds rate has climbed 150 basis points. Today the Fed is expected to hike a quarter point more AND give guidance on future rate hikes, the economy and inflation. The market expects both a rate hike and a dovish statement on the economy due to recent disappointing retail sales and diminished inflation, which I think is quite bi-polar. I’m taking the under. What if Powell doesn’t see the need for the anticipated four hikes but instead exercises patience or just plain deflects, leaning more on fiscal policy and re-balancing of the balance sheet. He was pretty bullish on the economy last time he spoke.

If Fed doesn’t raise today, the market would get very spooked. If Powell doesn’t guide that they are raising four times this year, the market might get spooked but bounce a bit after digesting. If he confirms four rate rises, the market can still get spooked on credit risk concerns (more on that later). More to the point, the market was spooked the last two times he has come to the podium and intonated a hawkish tone so not sure how he can talk that back. If he’s too bullish on the economy, or Trumpeconomics, then the market may anticipate even more future rate rises and do the work of the Fed – spike them – which could sink equities. Fun Times.

My Main Overriding Thoughts: Short, Intermediate, Long-Term

  1. Sure, we could get a spike in interest rates (see above rationale) but I still see the strong possibility for a sell-off soon after. Again, his first day on the job the stock market sold off 10%. When he gave his statement to Congress February 27th, stocks lost 5%. Is this time different? If he’s bullish inflation, like he was last time – both economic and wage growth – the perception is that he is bullish rates. And right now market seems to be skiddish about higher rates so if Powell is bullish rates, that may be very bearish stocks. In a nutshell, stock market fixes bond market every time rates move up.
  2. If traders view the Fed as more hawkish than anticipated, that could push real interest rates higher and boost the U.S. dollar. Balance-sheet reduction = higher rates/slower growth/lower stocks with USD rising as de facto tightening = smaller margins/lower stocks.
  3. About that liquidity issue (i.e. Fed balance sheet rebalancing), this tweet sums up my bigger picture thinking:

Fed Day and Credit Markets

The credit markets are already anticipating more Fed tightening which can lead to tighter financial conditions which can lead to stock drawdowns.

Must Read Perspective from Citi analyst and credit strategist! 

LIBOR-OIS has in recent years been a very good leading indicator for DXY, with higher spreads leading to a stronger dollar with a 3-month lag.

Libor-OIS and the DXY, then expect a massive spike in the dollar in coming weeks, which in turn would roil risk assets.

Why does it matter if Two-year Treasury notes have weakened in 24 of the past 27 weeks?

The lack of a fourth 2018 rate hike built into the Fed’s new “dot plot” projections, combined with what looks to be a crowded bet against short-term Treasuries, might be enough to lead speculators who are wagering on even-higher yields to take profits or close their positions.

They held a record net short in two-year note futures earlier this year. On the other hand, those same traders are less bearish than before on longer-dated Treasuries, according to Commodity Futures Trading Commission data.

Hedge funds and other large speculators pared their net short position in 10-year futures by 90,781 contracts in the week through March 13, the biggest such pullback in eight weeks. That helps explain the support for that part of the curve early last week, but it also leaves a clearer path for higher yields if the Fed is more optimistic about the economic outlook.

If traders view the Fed as more hawkish than anticipated, that could push real interest rates higher and boost the U.S. dollar. And don’t forget that massive short dollar trade that could add fuel to the fire!

So now what: I wouldn’t be surprised to see TNX higher to 3.03% with TLT lower in short term but then likely rates fall back as speculators take profits on their short-term treasury bet – pushing USD and TLT higher and with it GLD, SLV and Commodities lower. As the USD (UUP / DXY) moves higher, Tech will move lower. Then we will really see what credit markets are made of.

Stocks of Interest

FB – both JPM and WFC calling recent sell off a buying opportunity. Many will wait as Zuckerberg is breaking his silence with plans to address employees Friday. With that, $164 is Wk support and $170 is Wk resistance, so it can trade this channel for awhile…Above $170 = 172-174. (Still long $170C this week from $164 but will likely sell at $172 and add $165P.)

FDX – “could be off to the races today after reporting #s last night. The stock spiked to $262 on initial reaction only to fade to -1-2% afterwards- Analyst community seems to love the #s and we have Stifel out with an upgrade.” With that, above $255 is bullish! #ChaseIdea

VRX – Deutsche Bank continues to like risk/reward for Valeant shares #SwingIdea

Why Oil Refiners are moving higher: Refiners set for big boost from ship fuel rules.

Tech Concerns – GOOGL FB: The European Commission is set to unveil proposals today for a digital tax on US. tech giants that could further embitter the trade row pitting the EU against President Trump. The tax, expected to be about 3% of sales on companies with worldwide annual turnover above €750M, would come alongside a tightening of rules on data privacy.

Today’s Markets 

In Asia, Japan closed. Hong Kong -0.4%. China -0.3%. India +0.4%.
In Europe, at midday, London -04%. Paris -0.1%. Frankfurt +0.2%
Futures at 6:20, Dow flat. S&P flat. Nasdaq -0.3%. Crude +1.1% to $64.22. Gold +0.3% to $1315.70. Bitcoin +1.8% to $9073.
Ten-year Treasury Yield +1 bps to 2.89%

Events Calendar for Today

  • 7:00 AM EST       MBA Mortgage Applications Data
  • 8:30 AM EST       Current Account Balance for Q4
  • 10:00 AM EST     Existing Home Sales MoM for February
  • 10:30 AM EST     Weekly DOE Inventory Data
  • 2:00 PM EST        FOMC Policy Rate Decision (expected for 25 bps hike)

Earnings Calendar

  • Earnings Before the Open: ATU, FVE, GIS, WGO
  • Earnings After the Close: ALTR, FIVE, GES, MLHR, SCHL

Friday is also a big day

  1. Spending bill deadline to avert government shut down, third time this year.
  2. Deadline for steel and aluminum tariffs to get implemented, and find out which countries are exempt.
  3. Zuckerberg speaks to employees about recent data breach.

Good luck today and see you in the LIVE Trading Room tomorrow!


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