Today is Columbus Day, so don't expect any U.S. data or Fed speakers. Banks and the bond markets are closed.
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- "The president has authorized me to effectively shut down the entire Turkey economy and we can do that at a moment's notice on his command," Treasury Secretary Steve Mnuchin said Sunday. (ABC News)
- Ken Fisher apologized for comments made during an investing summit about hitting on women after the state of Michigan pulled $600 million from his $100 billion wealth management firm. (CNBC)
- Visa, Mastercard, eBay and Stripe have followed PayPal and dropped out of participation in Libra, the digital currency network spearheaded by Facebook. (CNBC)
1 big thing: Fed's Kashkari is sick of Wall Street's whining
Minneapolis Fed President Neel Kashkari has had it with the "hubris and stupidity" of Wall Street bankers.
- "Honestly, my patience for these market opinions is basically gone," Kashkari told Axios in an exclusive interview.
His latest grievances are with investors who claim the Fed is being bullied by President Trump and traders pointing fingers at the central bank for the liquidity crunch in the repo market that the Fed just announced a $60 billion a month standing facility to address.
Background: The systemically important repo market is where banks can quickly borrow cash in exchange for collateral like U.S. Treasury notes. Rates in the market jumped well above the Fed's target rate in recent weeks, prompting around $300 billion in daily injections from the New York Fed.
- Market participants have grumbled that the Fed's inexperience and lack of knowledge are to blame for the crisis.
Between the lines: However, Kashkari points out that the Fed provides a so-called discount window where banks can access cheap emergency funding to deal with exactly the sort of liquidity squeeze that hit the repo market. They just don't want to use it, which renders the window ostensibly useless.
- "They don’t like it because they think it makes them look weak," Kashkari said. "They don’t want to use it so the New York Fed should have run to comfort them more quickly with a new facility. ... That’s called the height of entitlement if ever there was one."
- "Banks are supposed to plan for their own liquidity needs. They did not do that adequately. And now they’re complaining because they failed to plan."
Flashback: Looking back at his time working under former Treasury Secretary Hank Paulson, Kashkari said the same problem presented itself in 2008 during the financial crisis.
"Why did Sec. Paulson and [then-Fed Chair Ben] Bernanke bring the 9 bank CEOs into Treasury on Sunday night and say 'You’re all going to take TARP at the same time?' Because if any of them said no they would all say no. It’s amazing. We have to work so hard to compensate for their own hubris and stupidity."
2. Brexit deal hope pushes pound to 3-month high
British politicians, including Prime Minister Boris Johnson, are urging caution on optimism for a possible Brexit deal between the U.K. and EU and say there remains "significant" work to be done, but investors have thrown caution to the wind and bet big on the British pound.
- The pound surged to its highest against the dollar since July on Friday, jumping nearly 2%. That followed a similar 1% jump on Thursday, marking sterling's biggest 2-day gain since before the June 2016 vote to leave the EU.
- The currency has risen steadily against the dollar since sinking below $1.20 in early September, its lowest level since 1985.
3. Investors kind of hate the "phase 1" trade deal
Wall Street was bursting at the seams with excitement about a trade deal between the U.S. and China — until details of the deal were revealed.
- China agreed to more than double its annual purchases of U.S. agriculture, up to $50 billion and made yet-to-be-determined concessions on intellectual property rights while the U.S. agreed not to implement its planned Oct. 15 tariffs of 30% on Chinese imports.
What happened: The S&P 500 was flirting with a 2% rise for the day, and then details of the agreement started leaking out and the market's gains leaked with them.
Between the lines: The S&P closed 1.1% higher, and the reversal looked like a typical bout of "buy the rumor, sell the news," but comments about the deal from top strategists and money managers suggest many view the agreement as too little, too late.
What they're saying: A flood of investment strategists and fund managers added their 2 cents. Goldman Sachs' analysts see a 60% chance more tariffs are put in place by the end of the year and expect the drag on manufacturing to continue.
- "The manufacturing industry has slowed to the point of stagnation," Goldman analysts said in a note. "While it accounts for a modest share of the economy, many investors worry that negative spillovers to the service sector and consumer confidence will drag down the healthy parts of the economy too."
- “There is not yet a viable path to existing tariffs declining, and tariff escalation remains a meaningful risk,” Morgan Stanley analysts said in a note to clients. “Thus, we do not yet expect a meaningful rebound in corporate behavior that would drive global growth expectations higher.”
- “The market has basically been held hostage by the trade negotiations,” Bryn Mawr Trust CIO Jeffrey Mills said on CNBC Friday. “I don’t know that we’re out of the woods yet with China. We still have trade negotiations going on with the EU [and] the ratification of NAFTA 2.0.”
- “Investors had high hopes for some form of mini-deal in the weeks before the meeting, and Friday’s announcement has at least been partially, if not fully, priced in,” JPMorgan equity analysts said in a note, adding that the deal is unlikely to have a material effect on the already slowing U.S. manufacturing and services sectors.
- “Trump’s statement that ‘We are near the end of the trade war’ is not plausible to us,” analysts at Evercore wrote in a note. “We do not expect tariff cuts in 2020 – but are ready to be favorably surprised."
- “I don’t think this gets us to Christmas,” UBS' NYSE floor director Art Cashin told CNBC. “I think it could be a temporary truce that wouldn’t last very long.”
4. Buybacks and the Fed could power stocks higher this year
While the most talked-about news on Wall Street proved to be a downer, U.S. equities are poised to get a power boost from 2 big sources soon.
What happened: On Friday, the Fed announced plans to buy $60 billion of U.S. Treasury bills a month “at least into the second quarter of next year.”
Why it matters: Despite the central bank's insistence that the cash injections “do not represent a change” in its monetary stance, it will help boost market liquidity and help stave off a crunch analysts were predicting could torpedo the stock market later this year.
- Fed funds futures prices also show traders see nearly a 78% chance the Fed cuts interest rates for the third time this year at its October meeting and a 27.5% chance of a fourth cut at its December meeting, according to CME Group's FedWatch tool. That would provide even more liquidity.
The market could also be buoyed by its old friend corporate buybacks. Companies increased buys of their own shares in the third quarter after a notable slowdown in the second.
- Buybacks in Q3 were up 27% from their level in Q3 2018, analysts at Bank of America Merrill Lynch said in a note to clients. The biggest sector driver was health care companies, which reported "near-record weekly buybacks" last week, and buybacks overall "have remained stronger than usual ahead of earnings season."