foxex: Rate Chop

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. U.S. Markets Erase Steep Losses

2. Bond Yields Plunge to Multi-year Lows

3. Germany Bonds hit Historic Lows

4. How Can the U.S. Devalue the Dollar?

Markets Closed

Dow
26,007.07 -0.09%

S&P
2,883.98 +0.08%

Nasdaq
7,862.83 +0.38%

VIX
19.49 -3.37%

Bitcoin
$11,897.73 +3.46%

US 10-Yr Yield
1.684 -3.16%

Markets Today

Stocks reverse massive selloff
Global bond yields continue to fall
Gold rallies to multi-year highs
Oil slides 4% on global growth fears

The selling in stocks started early Wednesday as uncertainty over the trade war and plunging bond yields around the world spooked investors. At its worst, the DJIA fell 589 points before steadily fighting its way back to a mere 25 point loss. The S&P500 and Nasdaq both reversed out of major losses to close positive for the day.

Gold futures hit a four-year high as investors ran from stocks into the relative safety of the precious metal.

Why stocks rebounded this afternoon is hard to know. Sometimes stocks and indexes hit resistance levels on the way up and support levels on the way down, triggering investors to buy or sell. These days, trading algorithms at the biggest investing institutions in the world have those levels programmed to take advantage of market imbalances. We may have hit one of those 'oversold' support levels this afternoon. We'll see if it holds tomorrow.

Rate Cuts Around the World

What may have triggered today's selloff was interest rate cuts by three major central banks. Central banks in New Zealand, India and Thailand all announced larger-than-expected cuts in their attempts to jumpstart their economies or bolster them as the global economic slowdown gathers steam.

Reserve Bank of India cut by 0.35%. Fourth cut of 2019
Bank of Thailand cut by 0.25%. First cut since 2015
Reserve Bank of New Zealand cut by 0.50%, twice what was expected

These rate cuts, in addition to the rampant uncertainty around the trade/currency war, has flushed investors out of stocks into safer assets like government bonds and gold.

That has pushed government bond or treasury yields lower and lower as their prices rise. Today, the U.S. 10-Year Treasury hit a near 4 year low of 1.71%. The 30-year U.S. Treasury hit an all-time low of 2.24%. When investors pile into long term treasuries, it's a sign that they have low confidence in the near term economic and stock market outlook. That's the world we are living in today.

What about Germany?

German government bonds are also traditionally considered a safe haven for investors. It has enjoyed a strong economy with a robust manufacturing sector and a healthy trade relationship with major economies around the world. But that perception has changed over the past two years as GDP has fallen from 2.46% in 2017 to a projected 0.75% in 2019.

Today, German bond yields plunged to new record lows as its 10-year fell to -0.58% while the 30-year hit an all-time low of -0.117%. You read that right... these are negative bond yields. If you buy these, you are effectively paying the German government to hold your money for you.

Germany is not alone. Central banks from Switzerland to Japan have negative interest rates, and the trend is to keep going lower. Here is the latest scorecard from Charlie Bilello

How the U.S. Could Weaken the Dollar

This has been a frequent question over the past few days for obvious reasons. Let's start with some of the basics:

The U.S. Dollar, unlike the Chinese Yuan and many other major global currencies, is not pegged to any other currencies. It is a floating currency and its value is set by market forces. In other words, it is worth what the market thinks it is worth.

The Yuan, as we know, is pegged to the Dollar. For the past four years or so, there has been an unwritten - but respected agreement - that it should be pegged at 7:1.

But China can change that ratio anytime it wants without anyone's permission. The People's Bank of China (PBOC), is controlled by the Chinese government. It is not an independent government body like the Federal Reserve.

Monetary Policy via the Fed

The Federal Reserve does not control the value of the Dollar, but it can influence its value. The most obvious way of doing that is through interest rates. By lowering rates, money becomes cheaper to borrow. Raising rates have the opposite effect. But neither actually change the real value of the Dollar as it is measured against other currencies. As currency traders and investors know, currencies are always measured against each other in what we call Currency Pairs.

The Exchange Stabilization Fund

The Treasury Dept., however, does have a mechanism for lowering the value of the Dollar, but it is much more complicated than what other countries are able to do.

The Exchange Stabilization Fund (ESF) is a U.S. Department of Treasury emergency reserve fund which includes holding of the U.S. dollar, other foreign currencies, and special drawing rights (SDR) funds. These funds allow the Treasury to intervene in the foreign exchange (FX) marketplace to promote stability in both foreign and domestic currencies.

One of the primary features of the Stabilization fund is its role in working with the International Monetary Fund (IMF) through the Treasury's special drawing rights (SDR). Special drawing rights (SDR) refer to an international type of monetary reserve pseudo-currency built from a basket of leading national currencies, backed by the full faith and credit of the member countries' governments. These funds may be added to existing foreign currencies to impact the exchange rates in the forex.

The Treasury can convert SDR funds into dollars by exchanging them with the Federal Reserve. SDR may be exchanged for USD, gold, or other international reserves held by the Fed. Most central banks will maintain a supply of international reserves which are funds that the banks can pass among themselves to satisfy global transactions.

So, yes... it's possible for the U.S. Treasury to weaken (or strengthen) the U.S. Dollar - but it's complicated. It has to engage with the IMF to do so, which may explain why the U.S. Treasury labeled China a 'currency manipulator', the other day. That brings the IMF into the conversation.

FedEx Breaks Up with Amazon

Breaking up is hard to do, especially with one of your biggest customers who accounts for a good chunk of your earnings. But that's what FedEx has chosen to do with Amazon.com.

FedEx said today it has decided not to renew the ground shipping contract with Amazon when it expires at the end of August. In June, FedEx said it was ending its air-shipping contract with Amazon in the U.S. but would continue to handle ground deliveries.

This breakup has been brewing for awhile as Amazon has been building its own delivery network that consists of everything from cargo planes, to fleet vans, to drones. It has also been experimenting with paying local delivery drivers to drop off packages at your home. Maybe you have run into one or two of them?

For FedEx, the choice was whether to stick with Amazon, which was blatantly experimenting with going its own way, or turning its back on the e-commerce giant to help every other retailer competing with it. Tough call.

FedEx released the following statement: "This change is consistent with our strategy to focus on the broader e-commerce market, which the recent announcements related to our FedEx Ground network have us positioned extraordinarily well to do."

Translation: It's a breakup.

Safe to say, Amazon has been preparing for this day for a long time.

More News:

Why China May Speed Past U.S. In the Robocar Race

Why a Recession May Come Faster Than Investors Think

Travel and Hospitality Stocks Could Offer Profitable Short Sales

chart courtesy www.koyfin.com

Shares of FleetCor Technologies rose by over 8% today after the release of its Q2 earnings report, which showed that its earnings and revenues had beaten estimates. The risk management services provider Assurant reported similar success in its second-quarter report, resulting in its stock price increasing by nearly 8%.

Abiomed's stock decreased by over 5% amid Pomerantz Law stating that a class action lawsuit had been filed against the medical implant manufacturer for violations of the federal securities laws. Meanwhile, shares of Disney fell by almost 5% today upon an announcement that it would be cutting the majority of Fox's film slate, after the recently-acquired studio cost Disney a $170 million operating loss in its fiscal third quarter.

The global markets generally had a strong day today, most notably Egypt and UAE. Italy and South Africa, however, might disagree with that sentiment.

Word of the Day

Support

Support, or support level, refers to the price level that an asset does not fall below for period of time. An asset's support level is created by buyers entering the market whenever the asset dips to a lower price. In technical analysis, the simple support level can be charted by drawing a line along the lowest lows for the time period being considered. The support line can be flat or slanted up or down with the overall price trend. Other technical indicators and charting techniques can be used to identify more advanced versions of support.