Summary
- The Fed meets in the last days of October to set policy for the period ahead.
- What may seem like the Fed reacting to mayhem, it looks like an opportunity building on the stock market. Negative news sells, but prices never lie.
- For the last three and a half years, Brexit was a drag on both the UK and the Eurozone economies.
- This idea was discussed in more depth with members of my private investing community, The Lead-Lag Report. Get started today »
I've found that in business, opportunities will constantly emerge or situations develop that make you revise your plans along the way. – Benjamin Cohen
That’s very close to the truth, especially if we look back at 2019 so far. With two trading months ahead of the end of the year, uncertainties are everywhere. Social unrest, trade war, Brexit, Syria – are just a few variables traders and central banks had to cope with.
The stock markets sit at the highs, FX volatility at low levels, and the market doesn’t react so to negative news. What if that’s about to change? Here’s a list of things to consider that might trigger significant market moves.
Fed meets in the last days of October to set the policy for the period ahead. As mentioned in a recent Lead-Lag Report, the implied odds for an October for a Federal Reserve cut have increased to above 70%, not previously seen since the summer. In Europe, the ECB cut rates and once again started buying bonds.
With such a high probability of a cut in the Federal Funds rate, the Fed most likely delivers. Look at the presser for Jay Powell to be grilled with questions about the repo market.
End-of-year flows may trigger some nasty surprises as not only that the repo market is not doing better, it's doing worse and needs more Fed medication. It looks like a massive QE in the making, bringing opportunities on the table.
If history’s telling us something, a quick look at the stock market performance offers some interesting perspectives. This is the MSCI AC World Total Return Index against its trendline since the lows in 2009. Note where we are now, two months ahead of the year’s end and how similar the patterns look like. So that’s the technical perspective. Couple the Fed’s potential cut next week, the repo “injections” and the T-bills buying, and chances are the market will fly higher.
What may seem like the Fed reacting to mayhem, it looks like an opportunity building on the stock market. Negative news sells, but prices never lie.
Europe doesn’t look bad either. The German DAX (EWG) is at 2019 highs, despite some disappointing manufacturing data and ongoing recession concerns. If the chart below (look at 2019 alone) reflects all the negativity we’ve heard so far this year, then I only want negative news to go long.
Even the battered European financial sector (EUFN) shows signs of waking up. For the first time in more than two years, Euro banks are currently breaking the downward trendline.
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This article was written by Michael A. Gayed. An author on Seeking Alpha and founder of the Lead Lag Report.
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