By: Charles McMillan Summons
A disappointing Friday session ended the NASDAQ down for the week by 0.5 per cent. The Dow lowered the most of the big three US indices during the week, suffering a 1.14 per cent drop. Despite the biggest inflow of funds into the highly liquid SPY in 2019 on Friday the 13th, the S&P500 remained flat throughout the week until it took a drubbing in Friday’s session to end the week down 0.84 per cent.
This is despite noticeable support from the Federal Reserve. From Wednesday to Friday, the Fed offered up $75 billion through a repurchase agreement auction (‘repo’ auction for short). Normally banks would give out overnight loans for companies to front the cash for short term obligations without liquidating any of their bond portfolio. The collateral for the loan is the bonds (usually treasuries) which the companies hold. Banks especially must have a minimum amount of cash on their balance sheets for regulatory purposes. This means that they rely on these short-term loans for their own obligations and also means that they cannot loan out all their cash.
However, this week a much higher number of orders on Wednesday bid up the repo interest rate to 7 per cent which begged the Fed’s liquidity injection. To ease this shortage of overnight cash, the Federal Reserve, America’s lender of last resort, began a huge auction. A further $8.875 billion worth of unfulfilled bids in the repo auction were submitted by Wall Street on the Wednesday. As can be seen in the chart below, this often occurs during tax time. What makes this case exceptional is that this method of providing ultra-short-term liquidity has not been used to this scale since 2008.
The widely-cited cause was low intraday liquidity from companies pulling out cash to fund quarterly tax payments. The intraday nature of this intervention does not suggest cause for panic just yet.
A rate cut of 0.25 per cent to 1.75 per cent by Jerome Powell saved Wednesday’s trading after a 0.8 per cent drop in the S&P500 rallied to slightly above break even on the news of the rate cut. The Federal Reserve chairman appeared much more solid in the press conference announcing the news. The message was the Federal Reserve was adopting a wait-and-see attitude instead of caving to Donald Trump’s raving attacks against Powell for not aiding him in his trade war against China by dropping the rate to 0 per cent. Powell made it clear that he did not believe a US recession was imminent and stated that quantitative easing would be the tool of choice should that eventuality occur.
In more specific company news, Microsoft approved a $40 billion share buyback program, much to the probably chagrin of Bernie Sanders and Chuck Schumer. The program has no expiration date so it is yet unclear when the benefits will accrue to shareholders. In any case, the news sent MSFT up 2 per cent above $142 on Thursday after its announcement.
The ASX200 finished positive for the week, up from 6,669.20 to 6,730.80 by end of trading on Friday – roughly a 1 per cent gain for the week. This was in spite of news that unemployment hit 5.3 per cent, its highest point since June 2018 after a seasonally-adjusted decade low of 4.9 per cent in February of this year. 50,200 part time jobs were created but 15,500 full time jobs were shed in August 2019.
While overall this change is marginal, the rise of the underemployment rate continually causes anxiety among some that consumer expenditure levels are having the rug slowly tugged from underneath them as disposable income steadily lowers. Underemployment on a seasonally adjusted basis rose from 8.4 per cent (July 2019) to 8.6 per cent (August 2019).
On Monday, the board of Bellamy’s, a Tasmanian infant formula producer, unanimously recommended acceptance of a $13.25 cash per share takeover offer by Chinese firm Mengdiu Dairy Company. Bellamy’s business has slid in the past year due to Beijing refusing to allow Chinese-labelled products in baby stores in China. Market share has thus been given up to rivals a2 Milk Company and Aptamil. Mengdiu is taking advantage of a depressed share price as a result of this state intervention. The takeover would likely solve this regulatory issue.
In this past week in the commodities market, attention was dominated by the drone strike on two of Aramco’s oil facilities by Yemen’s Iran-backed Houthi rebels. This attack over the weekend sent oil prices soaring on Monday. The Saudi’s confirmed more than 5 million barrels of oil production a day would be immediately lost, equivalent to 5 or 6 per cent of global supply.
Brent crude surged to almost $US72 a barrel on Monday, from $US60.22 on Friday, before the attack. It pulled back to under $US70 after frenetic trading. On that day, NAB predicted that oil could hit $US80 to $US90 a barrel over the next few months.
Oil prices then dropped on Tuesday based on news that Saudi oil output would return to normal within 2-3 weeks. Later in the week, the Saudis reported that one of the targeted facilities, Khurais, would attain full production by the end of September. This much more tempered report settled prices of brent crude to around $US58 by Friday morning.
More dour news struck Australia as the AUD/USD dropped marginally below 0.6800 on Friday night. Powell’s rate cut by 25 basis points worked favourably for the greenback thanks to his neutral tone on future moves.
Optimism has dwindled from the renewed US-China trade talks. Reports suggested America’s fearless leader was only consenting to lower-level trade talks at the minute which might lay the groundwork for high-level discussions early on in October.
Sources: Financial Times, AFR, ABC News, Australian Bureau of Statistics, MarketWatch, FXStreet