The Dow Jones rallied nearly 500 points on Tuesday as stock market bulls continued to buy Friday’s dip with reckless abandon.
Concerns about the coronavirus outbreak haven’t evaporated, but there’s a more powerful force driving the Dow: the Federal Reserve.
It was a banner day for the major U.S. stock market indices. The Nasdaq rallied 2.25%, closely followed by the S&P 500’s 1.7% advance.
At last check, the Dow Jones Industrial Average had gained 470.75 points or 1.66% to recover to 28,870.56.
Given the bump in risk appetite, it was natural to see some of the risk-off moves in the commodity sector reversed. The price of gold was walloped by 1.7%, while bitcoin bled 2% lower to $9,150.
Amid the chaos of the Iowa caucus debacle, the Dow appeared to take a risk-on cue from the fact that Bernie Sanders seems to have been denied his big moment. At least for now.
Betting markets, often the best early indicator, have given the anti-Wall Street Sanders a big lead, but the stock market ignored this fact on Tuesday.
While many headlines focused on a receding of coronavirus concerns, a slowdown in the rate of infection is unlikely to have been the principal bullish catalyst for global markets. China’s economic freeze is still in place, and skepticism is rampant about the integrity of the figures anyway.
Instead, as China pumps $173 billion of stimulus to keep its financial system on life-support, the Federal Reserve is making huge moves in the U.S. repo market.
This is a big deal. Even if investors don’t agree on whether this is QE or not, the reality is that it has correlated with a surge in investor sentiment – and stock market valuations.
Despite the strong correlation, Fed officials have vehemently denied the relationship.
Rumors are swirling that U.S. Treasury Secretary Steven Mnuchin – one of Trump’s staunchest supporters in the White House – is doing his best to force the Federal Reserve to be proactive in repo markets.
Nordea Research explained this process in a recent note:
On the USD liquidity front, we note that the U.S.Treasury’s cash balance is starting to look lofty. Is Treasury Secretary Mnuchin already lifting the cash balance as per his suggestion a little more than a week ago?
When the Treasury hoards cash, these dollars are not available as reserves in the banking system. At the same time, the Fed seeks a minimum of 1.5 trillion in reserves. So, If Mnuchin were to seek a TGA cash balance of 650bn on average instead of ~400bn it would force the Fed to do ~250bn more asset purchases.
Mnuchin’s most recent announcement kept the provisional balance at $400 billion, but these are “estimates and targets,” so there’s clearly some wiggle room for him to keep the Federal Reserve active if that’s his goal.
On a bright green day for the Dow 30, Exxon Mobil was the only stock that traded meaningfully lower (-0.9%).
Leading the charge was a massive 3.2% rally in Apple (NASDAQ: AAPL) that lifted its 2020 return to 8% just five weeks into the year.
One of the Dow Jones’ worst-performing stocks, Caterpillar (NYSE: CAT), enjoyed a moderate recovery. The construction giant rallied over 3.3% amid the global risk environment. Despite this climb, CAT is still down 9% year-to-date.
Another of the Dow’s most significant stocks, Boeing (NYSE: BA), was in a somber mood. BA shares were up just 0.4% amid the rising tide after admitting yesterday that the SEC was investigating its 737 MAX disclosures.
Disney (NYSE: DIS) was up 2.8% ahead of this afternoon’s earnings report.