Dow Rips 500 Points Higher as $94 Billion Fed Repo Juices Stock Market

The Dow Jones spiked over 500 points as the Federal Reserve made a $94 billion repo move that added liquidity to the U.S. stock market.

Posted in: Market News
Published:
February 4, 2020 8:35 PM UTC
  • A massive global risk-on rally lifted the Dow Jones on Tuesday.
  • As the U.S. stock market soared, the Federal Reserve made a huge move in the repo market.
  • The Fed’s liquidity mixed with efforts from China to support its own markets, creating a potent risk-on cocktail for the Dow.

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.

Dow Jones Roars After Fed Makes Huge Repo Moves

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.

The Dow Jones roared over 500 points as the Fed injected $94 billion of stimulus into financial markets. Source: Yahoo Finance

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.

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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.

Stock Market Feasts on Liquidity Splurge

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.

On Tuesday alone, Jerome Powell’s institution made a $94 billion injection into the system.

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.

There is a strong correlation between the Fed’s repo operations and the stock market upswing. | Source: Twitter @dke82

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.

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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.

The Treasury’s cash balance affects the Fed’s asset purchase program. | Source: Nordea Research

Dow Stocks: Apple & Caterpillar Lead Recovery While Disney Braces For Earnings

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.

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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.

This article was edited by Josiah Wilmoth.

Francois Aure @bullishtulips

Financial speculator & author living in the hills in Los Angeles. J.D. but very much not a lawyer. Favorite trading books are anything written by Jack Schwager. Email: bullishtulips@gmail.com,

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