As expected, the Federal Open Market Committee lowered its benchmark interest rate by 25bps on Wednesday but the move drew several dissents, coming from both hawks and doves. Powell indicated that the Fed’s two rate cuts this year were likely adequate as insurance against the rising global risks posed by Trump’s whipsaw trade negotiations with China.
Despite uncertainty around rate-path views, financial markets reacted favourably to this speech in a first time. However, stocks erased their gains on Friday as trade tensions resurfaced. A top White House adviser, Michael Pillsbury, said in an interview in Hong Kong on Thursday that the United States could impose much larger tariffs on Chinese goods if a trade deal is not agreed soon. To make matters worse, the Montana Farm Bureau announced a bit later that the Chinese agriculture officials who were due to visit U.S. farming states next week had canceled their trip at the last minute. This news dampened market sentiment and stocks promptly fell back into negative territory. That being said, the state news agency Xinhua tried to rectify the situation on Saturday confirming that China and the United States had “constructive” discussions on trade in Washington.
Nevertheless, all the U.S. equity indices finished in the red after market close (Nasdaq : -0.72%, S&P500 : -0.51%, Russell2000 : -1.16%). Same conclusion in China: MSCI All China-TW-HK down 1.36%. By contrast, Europe was treading water (MSCI EMU: +0.04%) while Japan inched up 0.41% (Nikkei).
Several sectors were hit by the latest jitters, starting with consumer discretionary (S&P CD index down 2.16%), industrials (S&P Industrials index down 1.47%) and tech stocks to a lesser extent (S&P IT index down 0.77%).
Defensive sectors did better: real estate (+2.06%) and utilities (+2.19%) led the pack as per usual when confidence is low. Healthcare stocks moved higher (S&P healthcare index up 0.99%) as Senate Majority Leader Mitch McConnell rejected Pelosi’s drug pricing bill. Energy (+0.99%) continued its winning streak after the drone/missile attacks which had wiped out half of Saudi Arabia’s oil production last week. The market was clearly unnerved by reports that the kingdom had asked to buy millions of barrels of crude from Iraq in order to ensure it meets its commitments to its own customers. WTI futures finished the week up 5.91% at $58.09 a barrel.
On the interest rate front, it is worth noting that the U.S. money market was hit by extraordinary turbulence, the cost of borrowing cash overnight via repurchasing agreements surging on Tuesday morning to as high as 10%! The New York Federal Reserve was therefore obliged to inject a huge sum of money into the market in order to help maintain the federal funds rate within the target range of 2.00-2.25% throughout the week.
The U.S. yield curve flattened again due to the ongoing tightness in funding markets. The 10-year Treasury yield (1.74%) is now only 5bps above that of the 2-year yield, while both remain firmly below the 3-month T-bill rate (1.91%).
Find the full report here: https://www.trackinsight.com/weekly-flow-report/2019-09-20/global
