What A Morning

It’s difficult for equity traders to imagine more positive news flow than what we’ve seen this morning.

• Positive comments from Mario Draghi and the European Central Bank
• Presidential tweets meant to further incentivize the Federal Reserve to match the ECB’s rate stance
• Positive news on the US/China trade front regarding a meeting between Presidents Trump and Xi, first announced via tweet then confirmed by Chinese media

I will assert that the timing of this news flow is not random. The Fed began a two-day meeting this morning and is scheduled to announce its results tomorrow. The President has a history of tweeting ahead of Fed meetings, undoubtedly with the hope of influencing the independent central bank. Also, the President will be kicking off his re-election campaign with a rally in Florida tonight. It would not be out of character for the President to want positive market and/or economic news to highlight at such an event.

One must now wonder what the Fed can announce tomorrow that will appease the markets. Fed Funds futures are implying about a 20% chance of a quarter point cut tomorrow, a whopping chance of an 80% cut at the July meeting, and a near-certain 95% chance of a cut by September. Coming on the back of the broad indices’ rallies in June, any comments that diminish those odds could provide a significant shock to the market.

In some ways, today’s news flow makes the decision much more difficult for Chairman Powell. A cease-fire, if not an outright fix to the escalating tariffs could provide an expansionary boost the economy that would reduce the need for a rate cut. One has to think that Mr. Powell must also be considering whether his actions can be viewed as acquiescing to political pressure. Today’s report that the White House explored the legality of demoting Chairman Powell must also be adding to his stress (the story was quickly refuted as being old, though not untrue).These considerations raise the possibility that the Fed may be as concerned with protecting its independence as with its “goals of maximum employment, stable prices, and moderate long-term interest rates.”

With stakes this high, it is crucial that traders and investors assess their risk tolerances and exposures. The stock market is once again flirting with historic levels and is doing so after a sharp spike higher. And to add to the stakes, there is a quarterly expiration of futures this Friday. Any move is likely to be exacerbated by the significant amount of hedging (or re-hedging) that is required as the indices move.

There are an inordinate amount of moving parts in the market over the next few sessions. Please use your best judgment as to whether you can properly assess the wide range of potential outcomes and decide whether your current positioning is appropriate.