US rates left unchanged

US stock index futures were a touch firmer in early trade this morning, building on Wednesday’s modest gains. Last night the US Federal Reserve concluded its final monetary policy meeting of 2019. The central bank kept its key fed funds rate unchanged from October in a target range of 1.50-1.75%. The accompanying FOMC statement said that rates are currently “appropriate” to support growth, jobs and inflation, while officials omitted prior language that said, “uncertainties about this outlook remain.” The FOMC’s quarterly Summary of Economic Projections included the “dot plot” which illustrates committee members’ forecasts for rates over the next few years. The main takeaway was that the FOMC anticipates no rate changes next year, with its 2020 estimates for fed funds falling to 1.6% from 1.9% back in September.

The troubled repo market

There was also considerable interest in Fed Chairman Jerome Powell’s subsequent press conference. This was of importance given the increase in the central bank’s balance sheet since mid-September. The increase came in the wake of a crisis in the repo market where overnight interest rates quadrupled in a single session, forcing the Fed to intervene and provide liquidity. But what was supposed to be a temporary measure is still taking place three months later. Analysts are speculating that the Fed’s short-term bill purchases could morph into full-blown bond purchases or QE4. When questioned, Mr Powell said that repo operations have “gone well so far” and “pressures in money-markets in recent weeks have been subdued.” But he also remarked that the Fed is “willing to adapt” its strategy on bill purchases.

Aramco IPO

Yesterday also saw the Saudi oil giant Aramco make history as the biggest public floatation ever with  a valuation of $1.88 trillion. Earlier today, shares rose again, briefly valuing the company at over $2 trillion. The initial public offering marks the culmination of a four-year slog by the state-backed oil giant to list and raise much-needed funds for Crown Prince Mohammed bin Salman's Vision 2030. This is a plan to diversify the economy away from sole reliance on fossil fuels.

US and China

With the Fed meeting out of the way, speculators will once again focus on headlines concerning the ongoing US/China trade dispute. The Sunday deadline for fresh US tariffs on Chinese imports is getting closer with speculators desperate to hear that some type of agreement has been made to avert another round of tariffs. Earlier this week White House Trade Adviser Peter Navarro said he "got no indication" that the US would postpone the tariffs planned for Sunday. Navarro’s comments conflicted with reports from the WSJ and Bloomberg that said Chinese officials expect President Donald Trump to delay the hike to allow more time for the reaching of an interim deal.


The Dow Jones Industrial Average (DJIA) has pushed back above the support line of the Andrews’ Pitchfork formed by the August, September, October pivot points. Last week’s break below support was very brief. But it’s worth remembering that the sell-off which triggered the break was caused by worries that the US and China trade talks were going nowhere. We’re now just four days away from the US deadline for a fresh round of tariffs to kick in. If the Trump administration cancels or delays these then we can expect a relief rally across risk assets. But if new tariffs do kick in on Sunday, this would be an escalation in the US/China trade dispute which currently isn’t being priced in.

When we look at the  Commodity Channel Index (CCI), we can see that there’s a lot of indecision around the Dow. At the beginning of the month, the Dow went from seriously overbought to oversold in two sessions. Now the CCI sits right on its own median line. While the Dow’s uptrend remains intact, anything could happen over the next few days where the US/China trade dispute is concerned.

David Morrison

Core Spreads

Core Spreads is financial trading as it should be. No noise – just tight spreads on thousands of markets.

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