Fed EMERGENCY Rate Cut! More Cuts Coming!
Another volatile week on wall street, and a lot to talk about. First of all, our prediction of rate cuts is coming true. Truth is, there were plenty of problems out there, repo was telling us these problems were beginning to breach. We expected some sort of event to occur as a way for governments and central banks to save face and maintain confidence in the system. “The economy is booming and stronger than ever” was shoved down our throats, but the devil was in the details…if you knew where to look. Coronavirus is now a way to deflect all the blame away from government and central bank monetary policy.
We were shorting the S&P a few weeks ago as market structure was telling us something was going to happen. Truly is prophetic, but these markets do have cycles that keep repeating themselves. In fact, Hedgeeye put out an interview with legendary forex trader John Taylor, who also discusses market structure was telling us something (he also mentions how the same occurred during 2001. How the economy was weakening and the market wanted to sell off and then 9/11 happened. He calls these outside influences). Market structure is real, and is a powerful tool we have used for trading and investing in any markets.
The interview with John Taylor can be seen here:
So the rate cut party began with the RBA cutting Australian rates from 0.75% to 0.50% (Australia has now had multiple cuts going back last year). And then the big one, which we shall discuss in more depth, we had an emergency 50 basis point cut from the Federal Reserve. To round it off, the Bank of Canada also cut 50 basis points the day after following our neighbours to the South.
For those who have followed my work on Canada, I have been saying shorting the CAD and going long Canadian Bonds (the XBB) was a great long term trade since last year. Leading up to the rate cut decision, the XBB was giving us a sign, and now XBB broke and closed into new all time highs. Once again, market structure was telling us what was coming.
This is not over. More cuts are coming on the path towards 0 and then negative rates.
So let us discuss the Fed emergency cut. Many market analysts and participants are divided about it. To be honest, many are on the side of the Fed should NOT have done this. The first argument, was the Fed should have waited for a red day before cutting. The Tuesday they cut markets were still green and were likely in pullback mode. So when should they have cut? Many agree the Fed should have awaited until the weekend, more specifically done the emergency cut on Sunday.
The second argument is that this does not display confidence. That the Fed panicked. The March rate cut is on the 18th, and the Fed doing an emergency cut before that…does this instill confidence? Or does this say that the Fed is panicking? Again, this cut may have increased fear and panic. Markets have closed lower for the week even with a promise for more cheap money.
But we are not finished yet:
There will still be a Fed decision on the 18th, and Fed futures is already predicting another 50 basis point cut. However, you should watch what the 10 year yield does. We are still seeing a rush into bonds, with the 10 year yield hitting historic lows of below .70%. The Fed must cut to stay ahead of the curve. If, from now until the 18th, we see the 10 year yield drop further, do not be surprised to see another emergency rate cut or probabilities of a 75 basis point cut increase. Once again, this is to force money into stocks as the stock markets will be the only place to go for real yield. In my opinion, money running into bonds is not for safety, but for capital appreciation as traders and investors are predicting further cuts.
In the end, will rate cuts do anything for the real economy? Many consumers are already maxed out on debt, will they want to even take more debt? They will be forced too.
Will the Fed cutting alleviate any Coronavirus pressures? If you were someone who was planning to travel, and then cancelled your hotel bookings and flight tickets, are you going to say “oh the Fed cut so I am going to spend more money now”? Likely not. The truth is the recessionary pressures are coming. Central banks will not have the ammunition to deal with it. They are attempting to thwart it now.
On to some charts. As discussed, the equity markets did not close higher even with a Fed cut. According to market structure, we are still in a downtrend as long as we are below the 3230 zone. We are awaiting for a lower high swing to be formed and confirmed, but of course, if we break back above the level previously mentioned, the downtrend is nullified. For a lower high to be confirmed, we need lower lows which means a break and close either below 2850, or for those wanting to perhaps get in a bit earlier, a close below the previous low candles bodies around 2950. If we get a close below this level, many will be expecting the lows to be tested again.
Oil took an absolute beating, with a negative 10% day on Friday. This is due to recession fears. The Coronavirus has forced the Chinese government to close parts of the country meaning not many commutes or driving is allowed. This is being factored into the oil price. Also, OPEC + Russia failed to come up with production cuts. Meaning there is still a glut of supply and now decreasing demand.
The weekly chart of USOIL shows the initial downtrend move from 76.90 down to 42.30 (which we fibbed). From here, we have yet to make our first lower high swing which is required in a downtrend. We not finally confirmed our lower high with this break and close below these lows as shown on the chart. A move lower is still expected.
Perhaps the best opportunity going forward will be in Copper. We have been watching this 2.50 level for a long time, and we have yet to make a lower high swing in this downtrend. This lower high would require us breaking and closing below 2.50.
Copper is known as Dr. Copper and is used to gauge the health of the world economy…not to mention that China consumes more than 50% of the world’s copper, which will likely not be happening now given the slow down in China.
If we expect to see recessionary trends develop, then copper will see an impact, and we expect a break of the 2.50 zone eventually when this begins to be priced in.
So once again folks, there will still be more volatility coming. Expect central banks to continue cutting rates. Be careful if you are a trader. Do not chase the FOMO and be patient and adhere to your trade criteria.
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