March Rate Cut is 100%!
Unless you have been living under a rock, chances are you are hearing about/witnessing/participating in this market turmoil. We at UnchartedFX gave a short signal last week on the 4 hour when the SPX500 was making a topping pattern way back at 3363. For those interested in our absolutely free trading group, you can join through discord here: https://discord.gg/akcgCVP
The markets have tumbled, erasing all the gains from October 3rd/2019 till February 20th/2020 in six days. It shows you that losses and down days accelerate much faster. Here in Canada, the TSX was shut down to a technical glitch. What was it really likely about? To stop the bleeding, they did not want people closing their stock positions which would add to the sell off. Many traders and investors both in Canada and America, experienced trouble closing positions in the first few hours of the markets, not allowing people to enter short and to close positions. Of course this is being attributed to volume and technical issues.
We shall look at the S&P, but what I really want to talk about is the Federal Reserve. It seems the answer to the Coronavirus is to cut interest rates. Fed chair Powell came out today (February 28th 2020) and said the Fed will do what it has to do. What are the tools left in the tool box? Rates cuts and QE. Some would say the QE bit can lead to a confidence crisis since it was seen as a desperate policy tool to combat a global depression like the 1920’s…also the Fed balance sheet is already at 4.2 trillion. How much more can they grow the balance sheet before market participants realize the truth: we are in a low interest rate period forever and central banks are becoming BUYERS of last resort. So it seems rate cuts is the answer.
Before this week began, the chance of a rate cut in March was 20%. Now by the end of the week, it is locked in at 100%. Now the question is how many basis points. Will it be 25 or 50 basis points? As you can see from the graph above, there is a 94.9% chance of a 50 basis point rate cut! For those wanting to learn how to use the Fed Fund Futures, I made a video on Youtube which can be seen here.
There are some suggesting that the Fed must take emergency measures, and do an emergency rate cut before the March 18th meeting. Some even saying this could occur this weekend. I think that if this would happen, it would cause more panic in the markets. It would cause a further sell off.
So how much more can these rate cuts really help? Is more debt the solution? JP Morgan is now predicting 3 rate cuts this year. Followers of my blog and work know I have been saying interest rates will be cut to 0 and then negative because of the problems with debt, and for the US, to combat a rising US Dollar. This Coronavirus seems like a great excuse for government and central bankers to save face. By saying that everything was going fine, monetary policy was working, and the economy was booming. Now this Coronavirus happened, so now we need to unfortunately cut rates and do other desperate measures.
In terms of the S&P, you can see the markets finally bounced today, with bonds also receiving a bid. Bonds are now being traded for capital appreciation as many are front running rate cuts. We have yet to see a lower high swing in this new downtrend on the daily chart. Market structure tells us this will have to happen. If by any chance we spike and close above the 3240 zone, this downtrend chance is pretty much over.
The thing is that if interest rates are dropping, it does show the Fed will do what they have to in order to prop the market. The market wants cheap money. In this world, stocks remain the only place to go for real yield. Not only this, but foreign money will look to the US stock market as other places are in worse shape. So there are cases for the markets to still continue higher. I am not saying this will happen, I am just going to await for a lower high swing if we get one and then assess. Many will be fibbing this recent move. Very interesting times here and these markets are definitely at a crossroad. Will the Fed’s rate cut force money into markets to chase yield, or has the damage already been done? Of course we will see recessionary trends. The Coronavirus has impacted flights and events, but has also disrupted supply chains and employment. Will these fundamentals even matter to investors and traders looking to chase yield?
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