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New York Federal Reserve Adds Liquidity to Financial Markets to Quell Volatility!

China Promises to Cut Tariffs on 800 US Products

Americans Now Have Jobs and Have Begun to Buy New Homes

By Glenford Robinson

In an effort to reduce volatility, the Federal Reserve Bank of New York added $46.8 billion in liquidity to Financial Markets.

In two separate operations in the form of repurchase agreements, or repos, the Federal Reserve Bank of New York added $28.8 billion in overnight liquidity and $18 billion in 14-day liquidity to the Financial Markets. The 14-day liquidity extends into the new year.  When the Financial System needs a boost in liquidity, the Federal Reserve intervenes through repurchase agreements by taking in Treasury and mortgage securities from eligible banks, which in effect equates to the short-term lending of central bank cash, collateralized by the securities involve.

Financial Market volatility dominated headlines since US-China trade disagreements began in early 2018, when President Trump announced on March 1, 2018 that the U.S. had imposed tariffs on all imports of steel, aluminum, and other metals from China. Following the announcement, wild swings in financial markets ensued. Currency and equities markets both reacted ferociously, causing widespread uncertainty. Some investors sought refuge in safe-haven assets, such as the U.S. dollar and Gold. The uncertainty prompted the USD to gain massive strength against other major currencies.

For example, before the US-China tariff war, it cost over $1.25 USD to buy one EUR on February 16, 2018, but after the trade war began, that value fell to a little over $1.08 USD per one EUR on October 1st, 2019. During this time, Gold rose $247.3 or 18.9% from $1,309.80, on March 16, 2018 to $1,557.10 on September 4th, 2019. Wow! Simply amazing. So, where did all this investor capital came from? It all came from other asset classes, mainly the equities market. Yep, the stock market, simply because investors became worried and uncertain about the US economic outlook as a result of the trade war, so they removed some of their investments from risky asset classes, such as equities, and moved them over to more stable safe-haven asset classes.

The S&P 500 dropped 594.33 points or 20.2% from a high of 2,940.91 points on September 1, 2018 to a very dangerous low of 2,346.58 points on December 1, 2018, then rebounded hitting a high of 3,027.98 points a few months later on July 1st, 2019. This is what we call volatility to the highest degree. So, it is very obvious that the Federal Reserve does not want this kind of volatility to occur again. So, the agency continues to add billions of dollars of liquidity to financial markets. The Fed’s reason for doing this is to ensure that the financial system has enough liquidity to keep short-term borrowing rates stable, given that the federal-funds rate stays within the 1.5% to 1.75% target range.

Since Mid-September when short-term rate unexpectedly shot-up as a result of corporate-tax payments and Treasury debt auctions, the Federal Reserve has been adding liquidity to financial markets. This has been a proven technique by the Fed for the past ten years.

In fact, ever since the Fed began employing this money-market intervention approach, short-term rates in the repo market have calmed. On Tuesday, the Federal-funds rate sat at 1.55%, while the tri-party general collateral rate stood at 1.5%. The tri-party general collateral rate tracts the cost of borrowing in the repo markets. The purchasing of treasury bills by the Fed builds up capital reserves in the banking system, which keeps short term rates low. Short term rates increase when banking system reserves decrease. The central bank hopes to cut back on repo interventions at the start of the new year, but expects to continue purchasing Treasury bills well into the middle of the new year.

China’s Ministry of Finance stated that the country will cut import tariffs on over 800 U.S. goods staring January after the two countries agreed on a trade deal. Beijing will cut import tariffs for goods, such as frozen pork, pharmaceuticals, paper products, and some high-tech components beginning January 1st, 2020. Earlier on Saturday, President Trump said that a breakthrough had been achieved between the two countries and that he expected a deal to be signed very shortly.

The EUR/USD currency pair rose over a hundred pips since news broke about the US-China Trade deal. Positive trade deal news bodes well for the European economy as China is an essential trade partner. As a result, major European stock markets closed in the green on Friday after the trade news. Investors exuberance levels lifted after data showed Chinese industrial profits rose the most in eight months. Mining equities lead the way as the best performers. The DAX 30 gained 36 points, or 0.3% to 13,337; the FTSE 100 added 13 points, or 0.2% to 7,645, its highest close since July 30th; the CAC 40 jumped 8 points, or 0.1% to 6,037; and the IBEX 35 Climbed 39 points, or 0.4% to 9,701, its highest close since August 9th 2018; while the FTSE MIB gave up 141 points, or 0.6% to 23,757.

On Friday the Dow Jones Industrial Average booked a new record high with Wall Street ending the day mixed. The S&P ended the day flat and the Nasdaq ended the day lower. Gold moved higher achieving its best week since August; equities investors could be getting a little cautious about the rapid rise of the stock market, thinking that what goes up might just be getting ready to come down. The S&P 500 and Gold are negatively corelated; when one goes up, the other comes down, so the fact that the price of Gold has begun to appreciate, then the value of the other asset class should be expected to do the opposite and depreciate. The Dow Jones gained 24 points or 0.1% to 28,645. The S&P 500 closed at 3,240, and the Nasdaq gave up 16 points or 0.2% to 9,007.

The Core Durable Goods Orders for November missed forecast of 0.1%, coming in at 0% and missing previous reading of 0.3%. The Thanksgiving holiday may have had something to do with such low numbers. Volatility in the monetary system could’ve also caused a reduction in the purchasing of large ticket items. Core Durable Goods Orders measures changes in the total value of new orders for long lasting manufactured goods, excluding transportation items. The core number gives a more accurate gauge of ordering trends as a result of the volatile nature of aircraft orders. A higher than expected reading indicates an increase in manufacturing activity, which should be perceived as a positive for the U.S. economy, and a bullish outlook for the USD, while a lower than expected reading indicates a decrease in manufacturing activity, which should be perceived as a negative for the U.S. economy and a bearish outlook for the USD. The U.S. Census Bureau released the Core Durable Goods Order Report on Monday, December 23, 2019 at 8:30 AM, New York Time.

New Home Sales corelates to the Durable Goods Orders Report, so the fact that the Report for November came in slightly less than expected, shouldn’t be too alarming, especially if the New Homes Sales Report for November came in better than previous reading. In fact, that was exactly what happened. The New Home Sales Report for November came better than previous readings of 710,000, by posting a current reading of 719,000, slightly missing forecasts of 734,000. These readings tell us that the U.S. economy still continues to grow. The New Home Sales Report measures annualized changes in the number of new single-family homes sold during the previous month. This report tends to be more impactful when released ahead of the Existing Home Sales Report as the two reports tightly correlates with each other. In addition, the Month over Month New Home Sales Report came in above expectations of -0.3% by posting a 1.3% reading, beating last month’s reading of -2.7%. This current reading further confirms that the economy continues to show signs of good health.

The Month Over Month New Home Sales Report measures changes in the percentage sale of new homes. A new home sale means any deposit or contract signing occurring either during the year the house was built or the year after it was built. A strong number indicates a strong housing market and therefore a strong economy. In general, a higher than expected New Homes Sales reading should be perceived as positive for the U.S. economy and bullish for the USD, while a lower than expected reading should be perceived as negative for the U.S. economy and bearish for the USD.

Positive New Home Sales numbers would suggest that Americans are buying new homes, and in order to buy new homes, people need to have jobs that give them the money to buy these new homes. So, we would expect to see a positive Initial Jobless Claims Report. Indeed, that is exactly the case. The latest Initial Jobless Claims Report released by the Department of Labor on Thursday, December 26, 2019 at 8:30 AM, New York Time beats market expectation by registering a whopping 222,000 Jobless Claims, beating forecasts of 224,000 and a previous reading of 235,000.

The Initial Jobless Claims Report measures changes in the number of individuals filing for unemployment insurance in the past week. The Initial Jobless Claims report precedes all U.S. economic data releases as the report is released on a weekly basis. The fact that the Report gets released so early in the months, its impact varies from week to week. A higher than expected reading should be perceived as negative for the U.S. economy and bearish for the USD, while a lower than expected reading should be perceived as positive of the U.S. economy and bullish for the USD.

New York Federal Reserve Adds Liquidity to Financial Markets to Quell Volatility

Disclosure

The Mstardom Finance trading team currently trades the EUR/USD currency pair, utilizing long, short, and hedging strategies. 

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Information in this video, and in our articles published on Mstardom.com, may contain forward-looking statements, which could involve high risks and uncertainties. Markets and instruments profiled in our videos and in our published articles, are for informational purposes only and should never be taken as professional investment advice or recommendations to buy or sell in these assets. You should do your own in-depth research before making any investment decisions. Mstardom Finance does not guarantee that the information presented in our videos and articles is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is timely in nature. Investing in Open Markets involves a high degree of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.

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