Saudi Arabia’s oil infrastructure was attacked last weekend which helped oil markets open outrageously higher, up nearly 15% on Monday. The US and Saudi Arabia quickly pointed fingers at Iran for being responsible for the whole thing. Halfway through the week Saudi Arabia announced that it is going to look to get back to original output a lot sooner than expected putting downside pressure on oil markets. This news was mainly contained in the oil markets.

Central bank interest rate decisions took center stage this week. The US Fed cut rates by 25 basis points midweek and said there would be no more cuts to end the year.  The Fed was also tasked with the Repo rate, more on both matters below. Other central banks had announcements this week. As both the Bank of England and Bank of Japan kept asset purchasing and rates on hold as expected. Norway on the other hand hiked rates based on their weak currency.  Friday saw additional monetary stimulus tweaks from the PBOC while India’s government cut corporate tax rates significantly resulting in a boon to the Indian stock market.

Trade talks continued this week in Washington in hopes that China would renew the agricultural purchase deal and softening from the US towards Huawei. The ideal outcome would have been proposed continued talks into October on a higher level. On Friday a Chinese agricultural delegation left early canceling trips to key US farm belt states, walking back some optimism seen around this week’s talks. Also in Washington, the USMCA seemed to crawl towards consideration by Congress amid reports Democrats were becoming increasingly frustrated by their inability to have a say in the ongoing negotiations with the Trump administration on the trade pact. Brexit talks continued between UK and EU officials with some signs negotiators were finally broaching details on potential workarounds to the thorny Irish backstop issue, inducing continued buying in the British Pound.

Here is a look of last week’s stock market on a daily basis (red vertical lines split days).

 

Stock Market and Sector Overview

Here is a break down of the weekly performance in various stock market sectors (top chart):

  • Energy stocks down 2.62%
  • Technology down 0.97%
  • Financials down 1.06%
  • Retail down 4.04%
  • Utilities up 1.48%

Overview of key markets last week (bottom chart):

  • Crude oil up 6.42%
  • S&P500 down 0.63%
  • Silver was up 2.68%
  • Gold up 1.86%
  • US dollar up 0.30 %

The Federal Reserve Steps up to manage Money Supply…

On Tuesday, after some technical difficulties, the Fed managed to pull through with the repo auction. The repurchasing agreements are the costs of borrowing cash overnight. Which skyrocketed early in the week and continued to do so. Why did it move so fast to the upside? There was a large difference between the funding needs and the funding. A repo auction is when the Fed takes in collateral in the form of Treasuries and other securities while providing cash in exchange, this is the first repo in massive scale done since 2008. More stimulus it seems. There we technical difficulties that halted the repo injection in the morning, the expected amount was USD $75 Bn, although only USD $53.15 Bn went through.

The USD $53.15 Bn is broken down like this:

  • $40.85 Bn with TSY’s as collateral at a 2.1% stop-out rate.
  •  $0.6 Bn with Agencies as collateral at a 3.0% stop-out rate.
  • $11.7 Bn with Mortgage-back securities as collateral at a 2.1% stop-out rate.

Why would the Fed put up a repo just now? Well, it was either this or launch QE, this may just be the tip of the iceberg. When the Repo is not enough, QE has to be implemented. To add to this, the Fed was scheduled for another repo on the Wednesday of another USD $75 Bn. A total of $125 Bn was injected into the market due to the spike in the repo rate. The repo rate popped into the 6.00% level and rebalanced down to 3.00% however it’s still not below 2.50%.

 

During the Fed meeting this past week, the Fed did cut rates be 25 basis points. However, Fed Powell said that this was the last time that the Fed would be cutting rates this year. That is not what the Fed Watch futures probabilities display, we still have at least one rate cut priced in by the end of the year. Another interesting thing that Jerome Powell said is that they would not be considering a rate cut if the markets falter. The economy is good and there is no need. Instead, he said they’d expect to buy securities and flow money into the market that way. Naturally, Trump is not happy about this he wants to see multiple rate cuts in one, and fast. Trump wants a 0% rate. While there were more dissenters to this rate cut. Fed’s Bullard wanted a 50 basis point cut! He’s Trump favorite should Jerome Powell leave…

Weekly Economic Calendar

A quiet week ahead after the Fed announcement halfway through last week. There is some news out of the US that is set to come out into the end of the week that will shed some light the Final GDP numbers. Before that, there is interesting news out of Europe after having announced a continued stimulus.

Monday, news out of Europe, French and German Flash Services PMI and German Flash Manufacturing PMI.

Tuesday, CB consumer Confidence out of the US and Official Cash Rate, and RBNZ rate statement out of New Zealand.

Wednesday, Crude oil inventories. Shall be especially exciting after all of the Saudi Arabia attacks.

Thursday, Final GDP numbers out of the US.

Friday, core durable goods orders and personal spending out of the US.

 

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