Wake Up Call: Jan. 17, 2024
Overnight futures were down in Asia and made their low at the European open. Since then they've been bouncing back which is the same pattern as Tuesday. Yesterday, the futures rallied back from overnight lows but then tanked at the U.S. open. They hit their low ~9:45am U.S. time and then BTFD kicked in until the afternoon when the gains dissipated. This is standard bear market action we've seen many times before.
Overnight News:
Global central banks are dialing back expectations for rate cuts. Yesterday it was in the U.S. by Fed Governor Chris Waller. Today it was ECB Chief Christine Lagarde in Europe.
"(Bloomberg) — Across the world’s biggest markets, traders are finally paying heed to warnings from central banks and winding back bets on aggressive interest-rate cuts this year"
FR: It's about time. There was no reason to believe rate cuts were imminent in the first place. It was merely Wall Street's consensus market call at the end of 2023. Recall that one year ago at the January FOMC, Powell put the kibosh on a Fed pause by saying interest rates are going higher. As of today, there are two weeks until the January FOMC and next week begins the pre-FOMC silent period.
Ironically, last year higher interest rates were a problem for Regional Banks, due to deposit outflow. This year, lower interest rates are posing a problem for banks, via Barron's:
"Should the Federal Reserve begin cutting interest rates later this year, then some banks could face short-term pressure on earnings, analysts say. The interest they earn on loans will fall. Their funding costs—what they pay depositors—will also fall, but potentially at a slower pace, and thus put pressure on earnings"
What can Powell say that could make banks stabilize - rates are going higher so deposit outflow will continue? Or rates are going lower, so earnings will implode?
Other News:
Markets are finally waking up (literally) to the economic implosion in China. Last night we learned that home prices are collapsing at the fastest pace since 2015: South China Morning Post
"Gold and other metal prices were falling as the latest figures from top consumer China weigh on market sentiment, revealing the country's economy grew at one of its slowest rates in decades last year"
"Meanwhile, the impact of shipping disruptions in the Red Sea seems to be having only a marginal impact on commodities"
FR: When it comes to commodities or any other market, when there are competing forces driving prices higher and lower, it comes down to which is the over-riding factor in the long-term. The conflict in Gaza is similar to the conflict in the Ukraine, it's providing a short-term supply boost to prices, but in the long-term it can't offset falling demand.
