Commenting on the emergency rate cut and today’s trading Gorilla Trades strategist Ken Berman said:
Q4 2019 hedge fund letters, conferences and more
Fed's Emergency Rate Cut Stirs Up The Markets
Today’s session was nothing short of chaotic, as liquidity dried up amid the Fed-induced wild swings. Although today’s emergency rate cut didn’t come completely ‘out-of-the-blue’, it still led to sudden and violent moves in the markets of some of the, usually most liquid assets, such as Treasuries and currencies, so it’s no surprise that equities also experienced one of their wildest days in recent memory.
The major indices all finished deep in the red following yesterday’s strong rebound, as the emergency 0.5% rate cut by the Fed wasn’t enough to ease the coronavirus-related worries. The Dow Jones Industrial Average (INDEXDJX:.DJI) was down 786, or 5.1%, to 25,917, the Nasdaq (INDEXNASDAQ:.IXIC) lost 268, or 3.0%, to 8,684, while the S&P 500 (indexsp:.inx) fell by 87, or 2.8%, to 3,003. Decliners outnumbered advancing issues by a 4-to-1 ratio on the NYSE, where volume was well above average again.
We had yet another historic day in financial markets, as the somewhat surprising rate cut led to very heavy trading across the main asset classes. The 10-year Treasury yield plunged below 1% for the first time in history, with the 30-year yield also hitting a new record low following the Fed’s announcements and the Volatility Index (VIX, +16%) covering a very wide range between 25 and 41. Now, the possibility of negative rates in the U.S. doesn’t seem as far-fetched as even a few weeks ago, as the economic uncertainty remains very high globally.
The Price Of Oil Bounces
The key sectors were slightly less correlated than during last week’s liquidations today, with the defensive utilities sector clearly outperforming the risk-on sectors. The battered energy sector also held up well thanks to the pre-OPEC-meeting bounce in the price of oil. Homebuilders were boosted by the emergency rate cut, but precious metals and the related miners were the clear winners of the session besides, of course, Treasuries. Tech stocks suffered the biggest daily losses, but large-cap banks also got hit very hard due to the declining rates across the yield curve.
Although the coronavirus outbreak in the U.S. is relatively tame, the number of cases is quickly approaching 100,000 globally, with over 3,000 fatalities. The virus’s mortality rate is 3.4%, according to the World Health Organization (WHO), higher than the initial estimates, even as China continues to report encouraging numbers. Analysts still expect the outbreak to turn into a full-blown global pandemic, but the economic consequences are hard to predict, and global central banks will likely follow the Fed’s example, unleashing another wave of monetary stimulus.
While volatility would likely remain high even without tomorrow’s key economic releases, we will also have one of the whole month’s busiest sessions in that regard. The ADP payrolls number is expected to come in at 170,000 following last month’s blowout reading, while the ISM non-manufacturing PMI is forecast to fall to 54.9, which would still be commendable in a global comparison. The Eurozone retails sales number could also make waves in pre-market trading, while the weekly crude oil inventories report could increase volatility in the energy sector during the morning session.
Emergency Rate Cut Fails: Short-Term Picture Remains Bleak
Technical Corner: Yesterday’s rally improved the technical picture on Wall Street, but today’s plunge all but negated those improvements and the short-term picture remains bleak, despite the still intact bullish long-term trend. The major indices all remain well below their declining 50-day moving averages of 3,260 for the S&P 500, 9,243 for the Nasdaq, and 28,724 for the Dow, while apart from the tech benchmark, the indices are also below their 200-day moving averages of 8,402 for the Nasdaq, 3,049 for the S&P 500, and 27,170 for the Dow.
Although percentage-wise, small-caps, as measured by the Russell 2000 were among the better-performing issues, technicals tell a different story. The index remained below both its moving averages throughout the session, even during the post-rate-cut spike, and due to the subsequent selloff, it got very close to its low from last week. The record low yields will likely continue to weigh on small-caps in the coming months, and should the Russell 2000 start to show signs of stability despite that, the correction will likely be nearing its end. Stay tuned!