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Notes from the Trading Desk: August 5, 2019

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U.S. equities moved lower last week as the S&P 500 posted its worst weekly performance of 2019. Tech was one of the hardest hit sectors, which caused the Nasdaq to fall 3.92%. The S&P 500 fell 3.10%, and the Russell 2000 fell 2.87%. The Dow held up in a relatively better manner than its peers, as it dropped 2.60%. A defensive posture gripped the marketplace once stocks began falling on Wednesday afternoon. REITs and Utilities both actually closed in the green for the week. Healthcare and Staples also outperformed the broader indices. Financials, Tech, and Consumer Discretionary stocks were the worst of the bunch as they fell 3.89%, 4.36%, and 4.57%, respectively. Treasuries sustained a large rally in the back half of the week. The spread between the 10-year treasury and the 3-month treasury plunged further into negative territory. The 10-year closed the week at 1.85%, while the 3-month closed at 2.06%. The move in the 10-year was rather dramatic as it fell from 2.08% on the 26th to its current 1.85% yield. Finally, the dollar — as measured by the ICE US Dollar Index — moved higher for the third straight week.

To say it was a busy week in the marketplace would be a bit of an understatement. The market’s initial stumble began on Wednesday following Fed Chair Jerome Powell’s press conference. Some investors had been clamoring for a 50 bps cut from the Fed. Instead, the Fed delivered on their telegraphed 25 bps cut. However, the shocker came during the press conference when Powell said that he viewed the cut as a “mid-cycle adjustment”. The implication being that we are not entering a full blown easing cycle quite yet, much to the chagrin of President Trump and dovish investors alike. In other words, the current Fed path seems to be more akin to the mid-90s when the Greenspan-led Fed cut in ‘94, ‘95, and ‘98. Powell’s initial comments caused many investors to believe that all bets were off for future rate cuts in 2019. The Fed Chair even went so far as to mention the possibility of future rate hikes. Powell’s comments ultimately caused the Dow to fall nearly 500 points in the 2 o’clock hour.

During his press conference, Powell justified the rate cut as being a result of the slowdown in global growth, inflation continuing to fall short of their target level, and trade tensions causing a slowdown in domestic manufacturing. In fact, Powell continued to harp upon the potentially detrimental effects that tariffs might have on business confidence and spending. Almost as if on cue, President Trump — who was very critical of the mere 25 bps cut — announced further tariffs on China Thursday afternoon. The proposal was to implement a 10% tariff on an additional $300b of Chinese goods, which as Bloomberg rightly pointed out — leaves essentially all Chinese goods being tariffed. The Dow proceeded to fall 550+ points in an hour and a half. However, retail was hit exceptionally hard as the latest tranche of tariffs is expected to hit consumer oriented goods. XRT — the SPDR S&P Retail ETF — fell 5+% intraday on Thursday following the announcement.

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Notes from the Trading Desk - August 5 2019
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