Market Brief – Thursday 1/31/19

The Fed is leading investors to slaughter, as economists, large-money managers, and the financial media is proclaiming the Fed is going support asset markets, even though nothing changed regarding the Fed’s monetary policy since their December meeting. The Fed was not expected to raise interest rates, nor were they expected to make any changes to their balance sheet unwind. The only thing the Fed didn’t do was provide forward guidance on expected hikes to the Federal Funds rate, which was last projected for two hikes in 2019.

Investors have resumed dumping bonds to buy stocks, as bond prices rise. Computer trading models and risk-parity models are going “all in,” which means soon everyone will be back in the market who got out, and stock prices are still not near their all-time highs. The key to watch is the bond market, which normally sees interest rates rise during risk-on rallies. The bond market is sending a clear signal to equity investors that this equity rally will not hold.

The same drain on liquidity is still occurring. The Fed is still destroying the Monetary Base and reducing World Dollar Liquidity. Despite easing from the European Central Bank and People’s Bank of China, they could not prevent Italy from entering a technical recession, which is two consecutive months of contracting GDP growth.

Adding to the bad news out of Europe is German retail sales, which fell -4.3% MoM in December, suggesting Germany is headed towards a recession as well. While U.S. investors celebrate a perceived dovish Fed, they don’t realize that if the rest of the Eurozone falls into a recession that it will impact the United States.

November new home sales rebounded strongly rising +16.9%, but it wasn’t enough to keep boost its negative year-over-year trend.

The factory data is not confirming the risk-on euphoria as China’s factory sector has contracted two months in a row. Not to be outdone, the Chicago PMI fell to the lowest level in two years but is still expanding.

Stocks closed near their session highs, after ramping up in early trading, as Amazon was set to report earnings after the bell. Amazon hit its target but offered lower guidance for the coming quarter, which sent their stock a little lower in after-hours trading.

Treasury yields also closed near their session lows, and as yields fall, liquidity conditions tighten in an already illiquid market. Ten-year Treasury yields are hovering over a major support level at 2.62%, which if broken to the downside, will see a rather quick move down to 2.5%. Thirty-year yields followed suit and closed under 3%. For thirty-year yields, the major support level is at 2.96%.

Stock prices and bond yields in the short-term follow each other. Based on their relationship, either 10-year Treasury yields need to be closer to 3%, or the S&P 500 needs to be closer to 2,400. With the large banks buying Treasury bonds and the Fed continuing to tighten, it’s more likely stock prices will head lower. To catch up with Treasury yields, the S&P 500 would need to fall approximately -10%.

Physical gold has moved over a key resistance level I’ve been watching, along with the mining stocks, but not from buying demand. The move in gold recently is perfectly correlated with the U.S. dollar, which tagged its 200-day moving average and bounced higher. When a security is trading above its 200-DMA, it’s considered bullish. With the dollar testing and holding support, it’s likely there is another move higher for the dollar, which would suggest a move lower in gold.

Gold and the dollar can move together, even though it’s not too common. During the financial crisis, which we aren’t experiencing right now, both asset classes can be perceived as a safe-haven, leading to both rising together. The dollar will likely retest its overhead resistance level, which should give a clue as to when a low-risk entry point will come for the rather volatile mining sector.

The M2 Money Supply has resumed its deceleration from the fourth-quarter drop in the stock market, which led to investors selling to hold money in cash. Based on the data, most of those who sold did not re-enter the market. The year-over-year rate of change fell to 4.89%, and the 6- and 3-month rates of change also rolled over to 2.61% and 1.80% respectively. A decelerating money supply means there is less discretionary money to be spent in the real economy.