What’s the Trade? | The WMA Weekly Market Wrap

September 25, 2019
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The attack on a Saudi Arabian oil field last weekend is still sending reverberations through markets, far and wide, and it could have long-term implications for much more than the price of crude. Most immediately, Saudi Aramco could take some time fully to restore output at its giant Abqaiq plant, with oil analysts saying that damage at the facility is more severe than originally thought.

This event and its aftermath remind me of I game we used to play when I worked on one of Wall Street’s big trading floors (and recounted in Michael Lewis’s first book, Liar’s Poker): “What’s the trade?” The idea of the game was to propose a hypothetical world event and decide what the best trade is in response (e.g., nuclear plant problem in Russia — buy potato futures).

Here is how “What’s the trade?” played out immediately after the oil field attack: I filled my car’s gas tank right away, even though I didn’t need to. Not surprisingly, oil prices saw the biggest move, with U.S. WTI crude futures rising by 15 percent, the largest uptick since 2008. Stock prices fell, with the Dow, S&P and Nasdaq all ending moving lower. Airlines were hit hard as JetBlue and United Airlines both fell nearly 3 percent while American Airlines dropped 7.3 percent. Energy stocks, on the other hand, had their best day of the year, with the S&P Oil & Gas Production ETF jumping almost 11 percent, and the S&P energy sector rising out of a bear market with its best session of 2019. Yields on the benchmark 10-year U.S. Treasury note fell by the most in 3 weeks, as traders sought safe haven U.S. government debt. Gold prices also jumped 1 percent.

Since Monday, not nearly so much has happened, as markets moved on to look for “new news,” most notably last week’s Fed meeting. On Wednesday, the Federal Reserve voted to cut short-term interest rates by a quarter-percentage point for the second time in as many months to cushion the economy against a global slowdown amplified by the U.S.-China trade war. While they left the door open to additional cuts, officials were split over the decision and the outlook for further reductions. The differing opinions among FOMC members helped drive the spread between two and 10-year U.S. Treasury yields close to inversion, with shorter-term yields rising as the long-end dropped. “Jay Powell and the Federal Reserve Fail Again,” President Trump tweeted. “No ‘guts,’ no sense, no vision! A terrible communicator!”

That doesn’t sound like positive news, does it? Moreover, at his post-meeting press conference, Fed Chairman Jerome Powell said:

“Since the middle of last year, the global growth outlook has weakened, notably in Europe and China. Additionally, a number of geopolitical risks, including Brexit, remain unresolved. Trade-policy tensions have waxed and waned, and elevated uncertainty is weighing on U.S. investment and exports. Our business contacts around the country have been telling us that uncertainty about trade policy has discouraged them from investing in their businesses.”

Domestic equities closed last week modestly lower. The broad stock market showed little reaction to the attacks and the ensuing jump in oil prices. Large-cap stocks outperformed small-caps. Higher-valuation growth companies held up slightly better than value stocks, with companies in the value-oriented transportation industry, which experienced steep losses as a result of the jump in oil prices, weighed on returns for the value category.

Oil prices remained volatile all week as Saudi Arabia adjusted its estimates for when it expects the production and processing facilities to come back online. Although oil prices moderated midweek, they still finished the week up approximately 6 percent.

Domestic stocks also displayed little reaction to Wednesday’s Fed’s decision to lower rates. Market participants had widely anticipated the move, and the Fed’s statement following the meeting had no substantive language changes from the previous meeting. Fed Chair Powell also seemed to stick closely with his script in his post-meeting press conference, giving investors little information about the central bank’s potential next move.

U.S. Treasury yields decreased as the jump in geopolitical risk in the Middle East seemed to convince some investors to move into safe-haven assets. Overnight lending rates were unusually volatile relating to the amount of bank reserves available for lending in the money markets. This caused the fed funds rate to break through the upper end of its target range before the Fed stepped in to inject more reserves into the system via overnight repurchase operations.

Stock markets in Europe were largely range-bound last week, even as trade negotiations between the U.S. and China resumed after two months and hopes for a Brexit deal rose. In Asia, Japanese stocks were up for the fifth straight week, while Chinese stocks retreated as a batch of closely watched indicators underscored the continued toll of the U.S. trade war on the country’s economy.

From the headlines…

As noted above, Wall Street is buzzing about the repo market. On Friday, the New York Fed injected an additional $75 billion into the repo market, its fourth liquidity injection of the week, after swap spreads fell to their lowest level on record.

Funds that track broad U.S. equity indexes hit $4.27 trillion in assets as of August 31, according to Morningstar, giving them more money than stock-picking rivals for the first-ever monthly reporting period.

The OECD cut its global growth outlook to 2.9 percent this year — down from its 3.2 percent projection four months ago, and the slowest since the financial crisis.

U.S. business optimism dropped this quarter to its lowest level in three years. U.S. home sales in August rose to the highest level in nearly a year and a half, sparking fresh hope that a protracted slump may finally be starting to reverse. Existing-home sales in August were up from a year earlier for the second straight month — following 16 straight months of declines.

Last year’s U.S. college graduates averaged about $29,200 in student loan debt — a record.

Economic activity in China cooled further in August, with industrial output and retail sales data suggesting sluggish demand and low confidence among businesses and consumers.

In 2010, coal supplied nearly half of America’s power, but this April, for the first time ever, renewables supplied more power to the U.S. electric grid than coal. Solar and wind are expected to power half the globe by 2050.

The U.S. continues to lag other developed nations when it comes to ensuring retirement security, according to the 2019 Natixis Global Retirement Index. In fact, the U.S dropped two spots to no.18 for retiree well-being, according to the annual index, which gives a snapshot of the well-being and financial security of retirees in 44 countries. And for all four indices measured, the U.S. ranked the same or lower this year.

What “retirement” means now.

The Nest Egg Game: Your life in 10 financial milestones.