Last week, like many analysts, I was closely watching events in Saudi Arabia. An important oil facility had been attacked, and initial reports indicated that 5% of the world’s supply of oil was knocked offline in the attack.
Oil was set to spike when markets opened, and it did.
By the end of the week, prices were back into the trading range that contained prices for most of July and August.
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For now, oil is on the back burner for traders. In part, that’s because the Federal Reserve pushed its way into the headlines.
We knew the Fed would make the news as it held a regularly scheduled meeting. As expected, the Fed cut the target range for the federal funds rate by 0.25%, for a new range of 1.75% to 2%. What was unexpected was the dissent associated with the decision. Three of the 10 voting members dissented. Two wanted to hold rates where they were. One wanted to cut rates by 0.50%. Later in the week, the New York Post reported:
The US manufacturing sector “already appears in recession” and overall economic growth is expected to slow “in the near horizon,” St. Louis Federal Reserve Bank president James Bullard said on Friday, explaining why he dissented at a recent Fed meeting and wanted a deeper, half-percentage-point rate cut.
To me, it’s important that Bullard’s concerns are based on what he’s seeing in his region. St. Louis is in the middle of the country, dependent on industry and agriculture for economic growth. He sees problems in the economy, and his view isn’t distorted by a booming tech sector or government spending. Bullard represents the “real” America. And, he’s concerned. That’s a big story. But few seemed to notice because Fed watchers were distracted by the Fed’s involvement in the repo market. This is big news, I believe, because it sounds so obscure.
I’m going to turn to The Wall Street Journal to explain this market:
What is the repo market? A repo is when one party lends out cash in exchange for a roughly equivalent value of securities, often Treasury notes. This market exists to allow companies that own lots of securities but are short on cash to cheaply borrow money. And it allows parties with lots of cash to earn a small return while taking little risk, because they hold the securities as collateral.
A key feature is that the cash borrower agrees to repurchase those securities at a later date, often as soon as the next day, for a slightly higher price. That difference in price determines the repo rate. Repo rates can rise for a number of reasons, but they do so particularly when there is a shortage of cash in the system, making borrowers willing to pay more to get their hands on it.
In simple terms, repos allow banks and financial firms to meet short-term cash needs. Rates surged, form about 2.4% to 10% last week which indicated the market wasn’t functioning normally.
The spike in rates indicated there was an unexpected demand for cash. The demand lasted through the week and the Fed intervened in the market and provided cash. The Fed said they will continue providing cash daily until October 10.
Action To Take
For now, the crisis is averted. But there could be another crisis in the weeks ahead or this crisis might bubble back to the surface.
These are important concerns. But for now, the stock market is bullish. The chart below shows the S&P 500 and my Profit Amplifier Momentum (PAM) indicator at the bottom.
PAM remains bullish, and it has turned prior to large down moves in the past. I’ll change my outlook on the market as the indicators dictate.