Market Brief – Friday 1/25/19

Asian markets kicked off today’s rally as China injected $25 billion of currency into the markets and the European Central Bank followed up with an injection of their own. Central bankers are desperate to keep stock prices up as the global economy continues to slide due to the decline in world dollar liquidity, courtesy of the Fed’s tightening.

Early rumors pointed to an end to the shutdown, which at the time of writing appears to be a partial end to the partial shutdown. Presuming the bill will be passed, the government will reopen until February 15. Additional hope stemmed on the upcoming Federal Open Market Committee meeting, where the Fed is expected to discuss their balance sheet unwind program.

Investors are hopeful the Fed is going to stop their unwind program, but they are wrong. The Fed discusses their balance sheet unwind program at every meeting, however, they are planning a more in-depth discussion during next week’s meeting. Fed Chair Powell has made no indication they will stop selling bonds from their portfolio, other than stating if conditions warranted, the Fed would evaluate their program.

Since Chair Powell and former Chair’s Bernanke and Yellen see no adverse effects from the balance sheet unwind, it is unlikely to expect them to stop the program. Since Powell stated they would consider pausing, they have continued to unwind. Powell’s has commented on the size of the balance sheet will be substantially lower, but large enough to support the amount of currency in circulation.

Today’s early jump in stock prices, nor part of this rally, have been confirmed by an equal drop in volatility, a rise in oil prices, or a rise in Treasury yields. Based on volatility, oil, and yields, this rally is short lived.

Stocks held their opening move but didn’t make any major moves after news broke that the government shutdown has temporarily ended. With government workers coming back, next Friday there should be a data release with how the big players in the market are positioned. With this data set unavailable the past few weeks, nobody has a clue what the big money is up to.

All investors can look at is trading volumes, which doesn’t show the big money is buying stocks. Today’s volume was slightly below average for the past week. Overall, stocks were flat for the week.

Treasury yields closed slightly higher for the week, but lower on the day. Looking at the Treasury bond ETFs, 7-10-year bonds retested and held the lower end of their supply zone, which is currently a resistance zone. With their 50-day moving average rapidly rising, Treasury bonds could get confirmation of their rally sometime next week. Rallies begin with a cross of the 50-day moving average and are confirmed by a successful retest of the 50-day moving average.

Oil and gas producers rallied early but ultimately closed right on their 50-day moving average. This is a potential indicator that the stock market is headed lower next week.

Physical gold, along with the mining stocks, shot higher today without any significant catalyst. All are back hitting overhead resistance, which for the physical metal, was rejected.

Agricultural commodities were slammed lower on a report that China bought the least amount of soybeans since 2008, but the Bulls drove prices back to the bottom end of the 6-month long supply zone.

Large US banks continue to buy a large number of bonds last as their CEOs have been encouraging people to buy stocks. As of the week ending January 16th, large banks added $22 billion of U.S. Treasury bonds, $34 billion of Mortgage-Back Securities, and shed -$12 billion of non-MBS. Clearly the bankers see a recession coming and the public doesn’t. Despite investors desire to short and sell Treasury bonds, the banks are keeping yields suppressed. Remember – as yields fall, so will stocks.