Yesterday’s big headline was the congressional hearing featuring the testimony of Fed Chair Janet Yellen. The hearing came in the midst of global economic concerns and the current dovish monetary policy throughout the world while the U.S. Federal Reserve has initiated the first rate hike in 9 years. While watching the two-plus hour dialogue it was clear to see that many Americans have concerns weighing on their confidence level in the FED. This was voiced by the representatives of Congress, as Yellen was grilled by lawmakers concerning matters ranging from global economic risk, to the minority unemployment rate, to issues such a subpoenas from the Congressional Oversight committee.
At the end of the day, Yellen seemed to reiterate her confidence in the U.S. economy as well as the decision making of the FOMC while continuing to say that her committee watches global markets very closely. Her comments were mixed; her prepared statement was more hawkish-sounding, but in response to direct questions, she came across, less hawkish – in fact, just short of dovish. She suggested that it would be problematic, at least from a legal perspective, to implement a negative interest rate policy.
As Yellen first took the microphone, equity markets rallied to new multi-session highs, and the S&P 500 futures made a high of 1877.75, up more than 30 handles from Tuesday’s close. However, as the Q/A session wore on, the equity markets wore down and began to drift lower going into the end of the congressional hearing, and then sold hard late in the day, to the point where markets still went down overall in spite of a $680 million MOC to buy. At the end of the day, the ESH16 settled the cash session at 1847.00, below the prior day’s close, and then drifted lower down to 1842 before the contract close.
Yesterday’s price action looked like a reversal pattern, since now the “Yellen high” of 1877.75 will become an important market figure as the index failed at the bottom of the 1875 – 1910 area, which has been the major price area in recent weeks.
For now, it seems the “Bernanke put” is at work in these markets, and that anything that comes from the Fed is probably going to lead to a mixed reaction at best as Yellen’s words are digested.
Global Negative Rates
It doesn’t seem that long ago that this terminology was seemingly unheard of. However, given the recent decisions from the Bank of Japan, and with the European Central Bank and Bank of China eagerly attempting to devalue currency, this idea is mentioned more and more in the mainstream and is even making its way into the Fed’s conversation.
Yesterday, BlackRock’s Rick Rieder was on CNBC; and while he said that he doesn’t believe the FED will seriously entertain the thought of negative interest rates, he did refer to the thought stating, “The new toy in the world of monetary policy is we’re going to negative rates.” Meanwhile this week, recently departed Minneapolis former Fed Gov Narayana Kocherlakota continued to beat the drum for the need of negative interest rates here in the U.S.
While negative interest rates would probably never occur in the U.S., they are the new “toy” of worldwide central banks. With the U.S. economy slipping, and with equity markets showing signs of the most looming weakness since the 2009 bottom, there is no reason to think that this idea won’t be continually floated in the media in the months to come.
In Asia 6 out of 8 open markets closed lower (Nikkei CLOSED%), and In Europe 12 out of 12 markets are trading sharply lower this morning (DAX -2.23%). Today’s economic calendar includes the Weekly Bill Settlement, Jobless Claims, Bloomberg Consumer Comfort Index, Janet Yellen Speaks, EIA Natural Gas Report, 3-Month Bill Announcement, 6-Month Bill Announcement, 30-Yr TIPS Announcement, 30-Yr Bond Auction, Fed Balance Sheet, Money Supply and earnings from Advance Auto Parts (AAP), CBS Corp (CBS), Kellogg Co (K), Mosaic Co (MOS), PepsiCo Inc (PEP), Reynolds American Inc (RAI), Thomson Reuters Corp (TRI) and more…
Bring Back the PPT
Our View: With China closed this week, it seemed the S&P had a good chance to rally, and it did; but with the Nikkei down 6.5% this week, there was a new bear that stole the show. On the other hand, the Yen rallied as traders unwound short positions to avoid the cost of carrying the currency trades overnight, which would have been affected by the interest rate difference. This negative effect on the U.S. dollar, combined with China reopening soon and weak February expiration stats, could keep a lid on gains for now. Our view, buy the early weakness and sell the rallies, ESH 1785 on tap.
As always, please use protective buy and sell stops when trading futures and options.
‘Bring Back The PPT and Say Hello To Global Negative Rates’
- In Asia 6 out of 8 open markets closed lower: Shanghai Comp CLOSED, Hang Seng -3.85%, Nikkei CLOSED
- In Europe 12 of 12 markets are trading sharply lower: CAC -3.06%, DAX -2.26%, FTSE -2.12%
% at 6:30am CT - Fair Value: S&P -4.42, NASDAQ -4.60, Dow -49.15
- Total Volume: 2.35mil ESH and 28k SPH
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