FOMC in FOCUS
Interest rates are pulling back today ahead of this weeks Federal Reserve meeting. With such a dynamic economy there is potential for surprises at the meeting. As expected with rates coming down, banks are struggling. Tech is also down, but by a smaller margin. I continue to watch out for days when the market is moving like synchronized divers. When banks and tech are down the same amount, that is when I expect Volatility to pop. For the rest of the week I will be watching first 10 year Yields, if they fall below 1.12 that is going to put serious pressure on banks. For XLF last Monday’s close of 35.11 is dangerous. A drop below that will mean that everything else in the market will have to come with it. An all clear for the XLF would be a close above the 50 day moving average of 36.97.
China Crackdown Continues
In a second day of selloffs for China and Hong Kong rumors are swirling that US funds are exiting China and Hong Kong assets. There has been talk for some time about US limiting investments in China, and perhaps the latest moves by China in limiting Chinese involvement in American markets were a precursor to any US move. Additionally there are signs that the regulatory crackdown in China coupled with the lack of foreign investment would be a double blow to their market that has been known for significant swings in volatility.
The risk we need to be aware of
Powell has said there is a shortage of T-Bills. Risk free short term debt. Reverse repo rates are at the highest level of the pandemic as the Fed seeks to avoid short term rates going negative. The larger this gets the more this soaks up the excess liquidity of the treasury department. Why does that matter? Well because congress sets a limit on the number loans the treasury can take in its debt ceiling. And the way we are spending lately that debt is going to run out fast. This repo could be in jeopardy if the debt ceiling is stretched to its limit, or if a global banking crisis happens such as an international regulatory war between the worlds two largest economies.