Fed attempt at calming markets fails
Wall Street plunge continues
By Nick Beams
22 December 2018
Wall Street had another wild day yesterday with the Dow ending down by 415 points, after rising by almost 400 points in the opening hours of trading. The S&P 500 index fell by 2 percent and the NASDAQ was down by 2.99 percent, capping the worst week for Wall Street since October 2008.
The Dow lost 1655 points for the week, a decline of 6.8 percent, its worst percentage drop since the onset of the financial crisis a decade ago, the NASDAQ lost 8.3 percent for the week and is now 22 percent below its high last August and the S&P fell by 7 percent and is now down 17.8 percent from its high.
Both the S&P and the Dow are on track for their worst December performance since December 1931, amid the Great Depression.
Bloomberg published an article noting that currently 38 percent of stocks are trading at 52-week lows. Since 1984, there have only been eight days when a larger proportion of stocks traded at those levels. Two of them took place during the October 1987 crash, when the Dow fell 23 percent in a day, with the rest occurring in October and November 2008.
The brief rally was set off by an interview with New York Federal Reserve president John Williams with the business channel CNBC in which he said the Fed was going into 2019 with eyes “wide open” and was willing to reassess its outlook for the economy and by implication its monetary policy.
He had clearly been given a brief to calm the markets after their adverse reaction to Wednesday’s decision to lift interest rates by 0.25 percent and indicate that the Fed was taking note. He defended the rate rise, based on the assessment that the economy would continue to grow next year, but said the Fed was paying close attention to financial markets.
The effect of his reassurances lasted about two hours before the markets started to plunge again.
The rate hike was not the only aspect of monetary policy which impacted the markets. There was an adverse reaction to the statement by Fed chair Jerome Powell during his Wednesday press conference that the wind back of its asset holdings, acquired under the program of quantitative easing (QE) when the Fed entered the market to buy bonds, was on “auto pilot” and would continue at the rate of $50 billion per month.
Under QE, the Fed expanded its assets from around $800 billion to more than $4 trillion. The effect of this measure was to push up the price of bonds and lower interest rates—the two have an inverse relationship. The downward pressure on interest rates under QE fuelled the continuation of the very financial speculation which had led to the crisis of 2008, giving rise to the longest bull-run on the stock market in history.
While the Fed began to reverse its QE policy 15 months ago, similar operations were continued by other central banks. But now they are moving in the same direction, tightening credit conditions in global financial markets.
One of the fears on Wall Street is that its dirty secret is being exposed and that just as the wave of cheap money under QE provided a major boost for financial operations its reversal, or quantitative tightening (QT), is going to bring an unravelling. This is because growth in the global economy remains well below the level attained before the financial crisis and it cannot withstand a return to what were once considered to be “normal” financial conditions.
There are increasing signs that the global economy is slowing significantly and could be headed for a recession. The year began with claims that in 2017 the world economy had enjoyed “synchronised” growth and had experienced its best year since the financial crisis of 2008.
But prospects for a continuation of that trend proved to be short lived and the year has ended with significant slowdowns in both the German and Japanese economies. Another indicator of global trends is the fall in commodity prices, with oil leading the way, having fallen by 30 percent in the last two months.
For most of this year, the US has been something of an outlier from this trend, with corporations receiving a major boost as a result of the corporate tax cuts enacted by the Trump administration at the end of last year. Trump claimed this would be a boost to investment and jobs. But that claim has already been given the lie by the major job cuts and closures announced by General Motors and the fact that the increase in corporate profits has largely been used to finance share buybacks and boost dividends.
It is significant that what the Financial Times described as a “tsunami of money”—estimated to reach $1 trillion for the year—has failed to prevent what could be the worst year for stock markets since the global financial crisis.
Besides financial conditions, trade-war tensions are another key factor in the sell-off. This was illustrated yesterday when an interview with Trump’s White House trade adviser Peter Navarro led to a further market fall late in the day.
Navarro told the Japanese news agency, Nikkei, that it would be “very difficult” for the US and China to reach an agreement within the 90-day deadline agreed to by Trump and China’s President Xi Jinping at their meeting in Buenos Aires on December 1.
Navarro, one of the main anti-China hawks within the administration, said there could be “no half-measures” and China had to address all US demands, including claims of forced technology transfers, cyber spying on business networks, state-directed investments and tariff and non-tariff barriers. In short, there had to be a total capitulation by China before any deal could be reached.
Underlining the central issues motivating the most hawkish anti-China forces within the administration and the military and intelligence apparatuses that have stepped up their offensive against China in recent weeks, he said: “China is basically trying to steal the future of Japan, the US and Europe, by going after our technology.”
He called the “Made in China 2025” program—the centre of its plan for industrial and technological development—a “label for a Chinese strategy to achieve dominance in the industries of the future.”
While China has dropped references to the plan in recent times, “no one in Japan or the United States really believes that they have abandoned the goals of China 2025.”
Another significant aspect of the present market plunge is the way in which economic processes are intersecting with growing political turmoil both internationally—the Brexit crisis in the UK being one of the most prominent examples—and the ongoing and deepening conflicts within the US political establishment.
Both the impending government shutdown in the US, over Trump’s insistence that funding for a wall between the US and Mexico must be included in any settlement of the standoff with Congress, and the political firestorm set off by Trump’s announcement of a withdrawal of US troops from Syria and the consequent resignation of Defence Secretary James Mattis have played into the market plunge.
In the longer term, the market and political turmoil is the outcome of the breakdown of the global capitalist order which erupted in the form of the financial crisis of 2008. In the decade since, none of the contradictions that produced it have been resolved, they have simply metastasized to return in even more malignant forms.
Market meltdown: Fears of a slowing economy worsen ahead of market close as the Dow drops another 600 points, Nasdaq barely avoids bear market and oil prices plummet to lowest point in 16 months
- Stocks are on track for their worst month in a decade this December
- The Dow Jones Industrial Average dropped as much as 600 points on Thursday before rebounding slightly to a loss of just 460 point at 3pm Eastern
- The S&P 500 index fell 2.3 percent but is on track to close at 1.12 percent down
- The technology-heavy Nasdaq composite is now down 20 percent from August
- The market swoon is coming even as the US economy is on track to expand this year at the fastest pace in more than a decade
The Dow Jones Industrial Average dropped as much as 600 points on Thursday before rebounding slightly to a loss of just 460 point at 3pm Eastern, bringing its losses since Friday to more than 1,800 points.
The benchmark S&P 500 index fell 2.3 percent but is on track to close at 1.12 percent down. It has slumped 11 percent this month and is now 15 percent below the peak it reached in late September. The technology-heavy Nasdaq composite did even worse, and is now down 20 percent from its record high in August.
After steady gains through the spring and summer, stocks have nosedived in the fall as investors worry that global economic growth is cooling off and that the US could slip into a recession in the next few years. Oil prices fell sharply again.
The market swoon is coming even as the US economy is on track to expand this year at the fastest pace in more than a decade. Markets tend to move, however, on what investors anticipate will happen well into the future, so it's not uncommon for stocks to sink even when the economy is humming along.
Right now, markets are concerned about the potential for a slowing economy and two threats that could make the situation worse: the ongoing trade dispute between the US and China, which has lasted most of this year and shows few signs of easing, and rising interest rates, which act as a brake on economic growth by making it more expensive for businesses and individuals to borrow money.
The selling in the last two days came after the Federal Reserve raised interest rates for the fourth time this year and signaled it was likely to continue raising rates next year, although at a slower rate than it previously forecast.
Scott Wren, senior global equity strategist at Wells Fargo Investment Institute, said that Fed Chairman Jerome Powell didn't appear concerned about the state of the US economy, despite deepening worries among investors that growth could slow even more in 2019 and 2020. Wren said investors want to know that the Fed is keeping a close eye on the situation.
'He may be a little overconfident,' said Wren. 'The Fed needs to be paying attention to what's going on.'
Powell also acknowledged that the Fed's decisions are getting trickier because they need to be based on the most up-to-date figures on jobs, inflation, and economic growth. For the last three years the Fed told investors weeks in advance that it was almost certain to increase rates. But things are less certain now, and the market hates uncertainty.
Treasury Secretary Steven Mnuchin said the market's reaction to the Fed was 'completely overblown'.
Investors are responding to a weakening outlook for the US economy by selling stocks and buying ultra-safe US government bonds. The bond-buying has the effect of sending long-term bond yields lower, which reduces interest rates on mortgages and other kinds of long-term loans. That's generally good for the economy.
At the same time, the reduced bond yields can send a negative signal on the economy. The bond market has correctly predicted several previous US recessions by buying long-term bonds and sending yields down.
At 2.15pm Eastern time, the S&P 500 index was down 49 points to 2,456, its lowest since August 2017.
The Dow fell 518 points, or 2.2 percent to 22,718. The Nasdaq composite shed 168 points, or 2.5 percent, to 6,468.
The Russell 2000 index of smaller companies dropped another 34 points, or 2.6 percent, to 1,314.
Smaller company stocks have been crushed during the recent market slump because slower growth in the US will have an outsize effect on their profits. Relative to their size, they also tend to carry more debt than larger companies, which could be a problem in a slower economy with higher interest rates.
The Russell 2000 is down 24 percent from the peak it reached in late August and it's down 14 percent for the year to date. The S&P 500, which tracks larger companies, is down 8 percent.
The possibility of a partial shutdown of the federal government also loomed over the market on Thursday, as funding for the government runs out at midnight Friday. In general, shutdowns don't affect the U.S. economy or the market much unless they stretch out for several weeks, which would delay paychecks for federal employees.
Oil prices continued to retreat. They've dropped more than 40 percent since early October. Benchmark US crude fell 4.5 percent to $46.02 a barrel in New York. Brent crude, used to price international oils, slipped 4.8 percent to $54.50 a barrel in London.
Bond prices were mixed. The yield on the two-year Treasury stayed at 2.65 percent, while the yield on the 10-year note dipped to 2.76 percent from 2.77 percent.
The gap between those two yields has shrunk this year. When the 10-year yield falls below the two-year yield, investors call it an 'inverted yield curve.' That hasn't happened yet, but investors fear it will. Inversions are often taken as a sign a recession is coming, although it's not a perfect signal and when recessions do follow inversions in the yield curve, it can take a year or more.
'The bond market has been telling us something for about a year, and that is there's not going to be much inflation and there's not going to be a sustained surge in economic growth,' said Wren, of Wells Fargo.
In France, the CAC 40 lost 1.8 percent and Germany's DAX fell 1.4 percent. The British FTSE 100 slipped 0.8 percent. Indexes in Italy, Portugal and Spain took bigger losses.
Tokyo's Nikkei 225 lost 2.8 percent and Hong Kong's Hang Seng gave up 1 percent. Seoul's Kospi shed 0.9 percent.
As investors adjusted to the prospect of a weaker economy and lower long-term interest rates, the dollar fell to 110.90 yen from 112.36 yen. The euro rose to $1.1483 from $1.1368. The British pound rose to $1.2688 from $1.2621. That sent the price of gold higher, and it gained 0.9 percent to $1,267.9 an ounce. Silver rose 0.3 percent to $14.87 an ounce and copper, which is considered an indicator of economic growth, fell 0.7 percent to $2.70 a pound.
Fed Chief: 2018 Best Year
Since Financial Crisis
EconomyPolitics2018Federal Reservefinancial crisisInterest RatesJerome Powellthe Fed
WILL THEIR CRONY BANKSTERS FINISH OFF AMERICA?
"One of the premier institutions of big business, JP Morgan Chase, issued an internal
report on the eve of the 10th anniversary of the 2008 crash, which warned that
another “great liquidity crisis” was possible, and that a government bailout on the scale
of that effected by Bush and Obama will produce social unrest, “in light of
the potential impact of central bank actions in driving inequality between asset owners
"Overall, the reaction to the decision points to the underlying fragility of financial markets, which have become a house of cards as a result of the massive inflows of money from the Fed and other central banks, and are now extremely susceptible to even a small tightening in financial conditions."
The ruling corporate-financial oligarchy controls
both parties and maintains its rule by alternating
control of the political institutions—the White
House, Congress, state houses, etc.—between
them. The general population, consisting
overwhelmingly of working people, is given the
opportunity every two or four years to go to the
polls and vote for one or the other of these
capitalist parties. This is what is called
"A decade ago, as the financial crisis raged, America’s banks were in ruins.
Lehman Brothers, the storied 158-year-old investment house, collapsed into
bankruptcy in mid-September 2008. Six months earlier, Bear Stearns, its
competitor, had required a government-engineered rescue to avert the same
outcome. By October, two of the nation’s largest commercial banks, Citigroup
and Bank of America, needed their own government-tailored bailouts to
escape failure. Smaller but still-sizable banks, such as Washington Mutual
and IndyMac, died."
Goldman Sachs, GE, Pfizer, the United Auto Workers—the same “special interests” Barack Obama was supposed to chase from the temple—are profiting handsomely from Obama’s Big Government policies that crush taxpayers, small businesses, and consumers. In Obamanomics, investigative reporter Timothy P. Carney digs up the dirt the mainstream media ignores, and the White House wishes you wouldn’t see. Rather than Hope and Change, Obama is delivering corporate socialism to America, all while claiming he’s battling corporate America. It’s corporate welfare and regulatory robbery—it’s OBAMANOMICS TO SERVE THE RICH AND GLOBALIST BILLIONAIRES.
Since Financial Crisis
EconomyPolitics2018Federal Reservefinancial crisisInterest RatesJerome Powellthe Fed