Market Brief – Wednesday 1/9/19

The global stock market continues to rise after ignoring the drop in Germany’s Industrial Production and the ongoing partial U.S. government shutdown. An official report on the trade meeting with China won’t be released by both parties until tomorrow, but the Wall Street Journal said that “the two sides remain divided on knottier issues including a reduction of Chinese subsidies to domestic firms and protection of intellectual property, and a resolution still needs to be hammered out.” Nothing has significantly changed other than China ordering more Soybeans.

With the government on partial shutdown, markets have very little economic data to work with, but retail investors, who are chasing this rally, seem to believe the worst is behind us. After being programmed over the past couple years to buy every dip or drop in stock price, regardless of what the news may say, investors, are once again playing chase.

As part of the shutdown, the department which reports the movements and holdings of large managers is also closed. The big-money traders and investors are currently moving around the market with a shroud of secrecy. As we approach fourth-quarter earnings season, corporate share buybacks will stop, which will leave the recent buyers absent the largest buyer of stocks.

The Department of Energy reported crude inventory levels this morning: Crude: -1.680M Cushing: 0.330M Gasoline: 8.066M Distillates: 10.611M. January normally sees a draw in crude stocks, but this report doesn’t reflect a large draw. Oil traded lower following the report.

Apple has cut orders by 10% on three of their iPhone models and has reportedly cut prices for Chinese vendors.

Yesterday investors pulled a record $27.2 billion from Vanguard’s short-term bond ETF to presumably buy stocks as they chase this rally.

After twenty straight years of gains, the Chinese automobile industry is facing an unexpected decline in sales as sales volumes are expected to decline 7% this year after falling 6% last year.

Mortgage applications shot higher last week as mortgage rates fell. Applications rose 23.5% while refinance applications jumped 35.3%. Without the IRS being able to verify incomes, expect mortgage applications to fall while the government remains shut down.

Today’s ten-year Treasury auction saw strong demand as direct, or domestic bidders, came in strong against their foreign counterparts. Foreign bidders grabbed 56.9%, directs took 20.8% and the dealers were left with 22.3%. Yields initially fell following the auction but couldn’t hold their losses as short-sellers strangely saw this as an opportunity to put the hammer down on bonds.

The Fed released the minutes from their last meeting today, and after Fed Chair Powell stated the balance sheet unwind could be adjusted if needed, many investors interpreted this to mean the Fed is putting a floor under the stock market. The minutes show the median projection for two more rate hikes this year and while there was discussion about the technicalities of the balance sheet, the minutes explicitly states the Fed will continue rolling off up to $30 billion per month in U.S. Treasury bonds and up to $20 billion in Mortgage-Backed Securities, even though the board mentioned they will not be able to reach the cap on mortgages for some time.

If the Fed provided liquidity for the markets, it will show up in Thursday’s report on the size of the Fed’s balance sheet. For now, investors are buying risk assets on the belief the Fed will come to their rescue.

The S&P 500 came close to tagging resistance at 2,600 but came up slightly short. With trading volume falling, it’s likely this brief rally is almost over. From a momentum perspective, the S&P 500 is at 0.04% and is likely to see its momentum turn negative tomorrow, which is a very bearish signal.

Ten-year Treasury yields closed lower, while 30-year Treasury yields closed higher. Both held their support zones, and with today’s strong 10-year auction in the books, tomorrows 30-year Treasury auction should see strong demand.

Physical gold and the gold miners keep trying to break overhead resistance but can’t seem to penetrate the wall of sellers. I still expect a pullback, and depending on how far it drops, it should be a buying opportunity.

Agricultural commodities quietly closed over their 50-day moving average.