American Stocks Hardly Reacted To Positive Trade News

American Stocks - Very Slight Monday Rally

The stock market rallied in the morning and sold off throughout the day. S&P 500 only closed up 0.12%. Nasdaq was up 0.36% and Russell 2000 fell 8 basis points. 

The initial rally was caused by the increased potential for a trade deal. President Trump stated America wouldn’t increase tariffs on China if a deal isn’t made by March 1st.

Traders bought the rumor and sold the news. Interestingly, the VIX was up 9.92%. This may have been caused by the intraday decline. Or also traders buying protection from a potential correction. The good news of the trade deal and dovish Fed are fully priced in. 

CNN fear and greed index increased to 70 which is greed. It’s surprising that this index hasn’t reached extreme greed this year. S&P 500 is up 11.54% year to date.

American Stocks - Fed To Remain Dovish

The best chance for the rally to continue is for economic growth to rebound. If it doesn’t, recession warnings will go out. If the economy rebounds, we will probably see stocks rally until the Fed turns hawkish again. I doubt the Fed will be hawkish at its March meeting which is in 22 days. 

There is a 97.4% chance rates will stay the same at that meeting. The difference between the 10-year yield and the 2-year yield is only 15 basis points. Which means a hawkish March meeting would probably invert the curve.

There is an 82.3% chance rates will stay the same all year. 

The chart below shows the chances of one hike by the Fed and the Bank of China. There is almost no chance of a hike by the Fed and a 35% chance the Bank of China hikes rates once. I don’t see why either would hike rates as there is only sparse evidence of a global economic recovery in 2019.  

(Click on image to enlarge)

The only potential for hawkish statements at the March meeting is from balance sheet guidance as the Fed will give us details on the timing of the end of QT. 

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