08 Oct A RELATIVLEY QUIET DAY
Equity markets struggled as all weighed the outlook for a trade deal. Treasuries slipped and oil rallied.
Some have commented that White House statements indicating it has no plans to delist Chinese companies helped offset the negative sentiment from Chinese remarks that it has narrowed the range of topics to be discussed. I am certain the interpretation of the upcoming meeting can be met by considerable volatility.
Third quarter earnings season is quickly approaching. According to JP Morgan, operating earnings are expected to contract by 1.4%. However this is third consecutive quarter profits were/are expected to decline. The Bank stated first and second quarter profits increased by 4.0% and 3.9%, respectively.
JP Morgan states energy is forecasted to post the greatest gains.
Many times I have commented about the illiquidity of the market, the result of regulatory fiat, the domination of technology based trading and the end customer is the only liquidity vehicle. Fear is more powerful than greed.
The SEC is now requiring ETF issuers to provide information about “Authorized Participants” or APs. APs act as gatekeepers for every dollar that enters or exits an ETF. Banks are about 60% of APs.
There are several issues hand. The smaller equity ETFs only has two or three APs versus 20 for the largest ETFs. Secondly ETFs that specializes in fixed income products have just three. Third APs are not paid for the service provided but instead turn a profit from secondary market trades that require an end user. What happens if the end user is nonexistent?
Many times I have commented about the lack of liquidity in the repo market forcing the Federal Reserve to act as the “banker’s banker,” the lender of last resort. It is generally accepted regulatory fiat created today’s liquidity crisis, fiat that forced money center banks to cease trading in this vital sector.
Three weeks ago few had heard of the repo market given that it was last utilized in September 2008. In years past the end user of repo was the customer, a customer who now is now no longer in existence. By default the Federal Reserve became the end user.
I ask what happens if the same occurs with ETFs as the end user disappears in times of crisis? It can get ugly really quick if this does occur.
Returning back to the here and now, trading today may again be dictated by five word trade centered headlines.
Last night the foreign markets were mixed. London was down 0.27%, Paris down 1.09% and Frankfurt down 1.18%. China was up 0.29%, Japan up 0.99% and Hang Sang up 0.28%.
The Dow should open moderately lower as the Administration is moving ahead with discussions around possible restrictions on capital flows into China with a particular focus on investments made by US government pension funds. The 10-year is up 11/32 to yield 1.53%.