20 Sep A MIXED DAY
In my view the conversation is intense amongst brokerage professionals who have knowledge about Fed policy as to why the Fed conducting its fourth consecutive repo operation. Before Tuesday, the last time the Fed intervened was September 2008.
Earlier in the week Fed Chairman Powell essentially dismissed the question stating that this is part of the Fed’s function. This is correct as in decades past the Fed intervened various times especially at quarter’s end.
By definition, the Federal Reserve is the banker’s banker, the lender of last resort.
Yes the Fed is providing the necessary liquidity but the larger question exists as too why it must now act following an eleven year hiatus.
Is it the result of regulatory fiat that has drained liquidity from the market? Is it the result of the Federal Reserve paying interest one excess bank reserves albeit this interest rate as of Wednesday is 5 now bps below that of the fed funds target range? Or is there something larger such as a non-bank financial suffering liquidity issues.
I do not know but I will write that if it is something of significance all will know in the next 7-10 days. As noted several times, Credit Suisse, a firm that is prime broker for many hedge funds, stated it expects several firms to fail by month end because of the intense volatility beneath the surface that has decimated almost every trading strategy. The only one that has not imploded is passively indexing.
All markets were mixed yesterday. Oil was up about 1% over doubts as to whether or not Saudi Arabia can restore capacity at the pace announced. There was little reaction to Iran’s threat of all-out war if attacked. Nor was there much impact upon the President’s tweet saying that war might not be avoided. Treasuries were essentially unchanged.
What will happen today?
Last night the foreign markets were up. London was up 0.17%, Paris up 0.44%, and Frankfurt up 0.18%. China was up 0.24%, Japan up 0.16% and Hang Sang down 0.13%.
The Dow should open nominally higher on potential trade optimism. Oil is advancing another 1% on Middle East tensions. The 10-year is unchanged at 1.79%.