Market Brief – Tuesday 5/7/19

After markets closed yesterday, the Trump Administration confirmed there would be an increase in tariffs on Friday after investors shrugged Sunday’s tweet by President Trump as a negotiating tactic. It is an interesting tactic to slam Asian stock markets by threats of further tariffs after U.S. markets are closed.

Equities headed lower in early trading as Treasury yields broke through a recent short-term support level. Volatility also broke over its three major moving averages and is now threatening to break much higher, which will bring equity prices lower.

Last Thursday I mentioned that the 3-month growth rate of the money supply has been flat. In the past, this has resolved itself in the short term through a stock market correction, which tends to flush money out of stocks and back into cash where it is counted as part of the money supply. Add this to the list of reasons why stock prices are headed lower despite claims of how high stocks will go when a trade deal is struck.

China is still sending a delegation to the U.S. for another round of trade talks. It was previously reported that a key member of the negotiating team, Vice Chairman Liu, would not be in attendance. Last night news broke he would be attended after all, but stock prices still fell.

While the world anticipates higher stock prices should a trade deal be struck, investors should focus on market liquidity, which is being drained by a rising Treasury bond market and a near-contracting money supply. Not to mention that as of today, 10-year Treasury yields are below the Federal Funds rate, which isn’t a good indicator of a healthy economy.

Today’s $38 billion 3-year Treasury auction was met with weak demand as foreign investors backed off their purchases by taking 37.9% of the auction, which is down from 42.7% last month. Domestic bidders took 20.0%, which left securities dealers with 42.1% of the auction. Despite the lack of demand, Treasury yields fell following the auction.

Twenty minutes before market close, investors came in to buy the dip as the major indices closed lower today. Unfortunately for these dip buyers, today’s closing prices will see further selling tomorrow as computer controlled trading programs are set to sell tomorrow. Just when investors felt they couldn’t lose, the selling begins.

Treasury yields closed lower with 10-year Treasury yields closing at 2.45%, which is 0.05% lower than the Federal Funds rate. Tomorrow’s 10-year Treasury auction should further drain liquidity and lead to more selling of risk assets.

Volatility jumped higher today and with a record short volatility position, those who are short are going to be forced to cover. The volatility curve is now inverted, which will also force investors to buy volatility. Once again, the three-month and ten-year Treasury yields are inverted which is a sign of stress in the financial system.

Investors continue to short agricultural commodities despite a report that even more rain and flooding is coming to the Midwest which may persist into June. Farm bankruptcies are soaring as well as demand from auctioneers to sell farm equipment. Some farmers are reporting they will be unable to plant this year and possibly even next year due to a historic amount of rain and flooding.

The American Petroleum Institute reported crude oil inventories as Crude: +2.81mm (+1.2mm expected), Cushing: +618k, Gasoline: -2.833mm, and Distillates -834k. Crude oil bounced higher on the report as the larger-than-expected gasoline draw should lead to a crude oil draw in the future. Higher gasoline prices lead to lower demand.