The Fed is soaking up nearly $1 trillion from market participants awash in cash and desperate for returns

Federal Reserve
A person walks by the Federal Reserve on Saturday, April 25, 2020.

The Federal Reserve’s daily cash operations approached $1 trillion on Wednesday, as banks and other market participants drowning in cash look for somewhere to park their money.

The Fed’s “reverse repo” facility, where financial institutions can deposit cash overnight, took in an all-time high of $992 billion on Wednesday, according to Fed data. Usage shot up 121% in the month of June and is up 248% from April 2020, the last time the facility saw heavy use. At the beginning of 2021, the facility went essentially untouched.

Some observers worried the unprecedented volumes of cash could spell trouble for markets.

“This is far more important than people realize,” tweeted Guy Adami, a trader and former CNBC host. Adami described it as “eerily reminiscent” of “nasty market action” that occurred in September 2019, when a cash crunch caused the repo market to seize up.

But New York Fed President John Williams reassured investors last week that he was not concerned by the level of reverse repo activity, according to Reuters. Should volumes increase further, “it would just be a sign that it’s working as planned,” Williams reportedly said.

The record level comes after weeks of all-time highs, as an “overflowing river of liquidity” washes over markets. Most recently, the flood has come from the Fed’s ongoing asset purchases combined with a legislative requirement that the US Treasury must run down its cash holdings by the end of July.

Because most short-term investments yield virtually nothing, investors have flocked to the reverse repo facility – which yields just 0.05%.

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US stocks slip from record highs as investors mull weak retail-sales data ahead of Fed decision

Stock Market Bubble
A trader blows bubble gum during the opening bell at the New York Stock Exchange (NYSE) on August 1, 2019, in New York City.

  • US stocks slipped from record highs as investors mulled the disappointing retail sales ahead of the FOMC’s two-day meeting.
  • The 10-year Treasury yield has hovered near 1.5% for most of the day.
  • Crude oil traded at the highest level since 2018, while lumber, gold, and copper slipped.
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US stocks slipped from record highs Tuesday as investors mulled the disappointing retail sales ahead of the Federal Open Market Committee’s two-day meeting.

Spending at US retailers for the month of May slumped for the first time since February as more economic restrictions were reversed and Americans settled into a new sense of normal.

US retail sales fell 1.3% in May, the Census Bureau. Economists surveyed by Bloomberg held a median estimate for a 0.7% decline. The decline places monthly sales at $620 billion and just below the record-high seen in April.

Meanwhile, investors continue to weigh inflationary pressures ahead of the FOMC decision due Wednesday. Most economists are anticipating that the central bank will leave its policy mostly unchanged. Investors will be focusing on tapering discussions, the latest economic projections, and inflation.

“Despite the ‘transitory’ message regarding inflation, some on the Committee must be twitching a little uncomfortably,” said Marcus Dewsnap, head of fixed income strategy at IGM, which is part of Informa Financial Intelligence.

Hard data so far hasn’t quite suggested the sort of second-quarter that will force economic growth to hit the Fed’s 2021 projection, Dewsnap added.

The 10-year Treasury yield hovered near 1.5% for most of the day.

In March, Fed officials saw consumer prices rising 2.4% in the fourth quarter of 2021 from a year earlier. That pace, they said, would be consistent with their goal of 2% average annual inflation over the long run.

Here’s where US indexes stood at the 4:00 p.m. ET close on Tuesday.

Online gaming company DraftKings plunged as much as 12% on allegations by a short seller of illegal activity. A report from Hindenburg Research, a short seller, claimed DraftKings is hiding “black market operations.”

Meanwhile, short-sellers betting against meme stock AMC Entertainment lost $512 million on Monday when the movie theater chain rallied 15%, according to Reuters, citing data from analytics firm Ortex.

Solid Power, an electric-vehicle battery producer, announced it’s going public by merging with blank-check firm Decarbonization Plus Acquisition Corporation III in a deal valued at $1.2 billion.

In cryptocurrencies, bitcoin finally hit the $40,000-level on Monday after trending below that level to date in June.

Still, a new survey found that hedge fund bosses are planning to ramp up their holdings of cryptocurrencies, predicting that an average of 7.2% of their assets under management will be held in digital tokens by 2026.

Crude oil traded at the highest level since 2018. West Texas Intermediate crude was up 1.96% to $72.27 per barrel. Brent crude, oil’s international benchmark, gained 1.78% to $74.16 per barrel.

Gold slid 0.45% to $1,858.92 per ounce.

Copper also tumbled to a seven-week low amid concerns that China will gradually release its stockpiles in the coming months.

Lumber joined the downturn, sliding for the 10th straight day before mounting a recovery as the pandemic-driven boom in the commodity continues to show signs of weakness.

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US stocks hover near record high as investors await Fed comments on inflation

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  • US stocks hovered near record high Tuesday as investors await comments from the Federal Reserve.
  • The FOMC decision is due Wednesday after a two-day policy meeting, with most economists anticipating the central bank will leave its policy mostly unchanged.
  • Bitcoin rose past $40,000 after Elon Musk tweeted about Tesla and payments.
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US stocks hovered near record highs Tuesday as investors await comments from the Federal Open Market Committee about a timetable for scaling back on its accommodative policies.

The FOMC decision is due Wednesday after a two-day meeting, with most economists anticipating the central bank will leave its policy mostly unchanged. Investors will be focusing on tapering discussions, the latest economic projections, and inflation.

“It is going to be increasingly difficult for the Fed to soothe markets with its dovish stance, as they probably will be discussing tapering and will have to revise up forecasts for economic growth and inflation,” Bank of America said in a note on Tuesday.

While the central bank can exhibit patience this time, the situation will not be the same by the July and September FOMC meetings, Bank of America added.

In March, Fed officials saw consumer prices rising 2.4% in the fourth quarter of 2021 from a year earlier. That pace, they said, would be consistent with their goal of 2% average annual inflation over the long run.

The S&P 500 closed at a record high on Monday for the second trading day in a row. The tech-heavy Nasdaq also closed at a record.

Here’s where US indexes stood at the 9:30 a.m. ET open on Tuesday.

Meanwhile, US retail sales fell 1.3% in May, the Census Bureau said Tuesday. Economists surveyed by Bloomberg held a median estimate for a 0.7% decline. The decline places monthly sales at $620 billion and just below the record-high seen in April. The April sales data was revised higher to a 0.9% jump from an initially unchanged reading.

Bitcoin finally hit the $40,000-level on Monday after trending below that level to date in June. Still, many, including investment adviser Rich Bernstein, believe that bitcoin is in a bubble, and the crypto mania is making investors ignore other asset classes that have more potential.

Bitcoin bull Michael Saylor’s MicroStrategy for its part plans to sell as much as $1 billion in common shares with an eye to adding to its huge holding in the cryptocurrency, it said in a filing with the Securities and Exchange Commission.

Oil edged higher. West Texas Intermediate crude was up 1.17% to $71.71 per barrel. Brent crude, oil’s international benchmark, gained 1.02% to $73.60 per barrel.

Gold slid 0.12% to $1,865.09 per ounce.

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S&P 500 hovers near record highs on continued economic optimism and Fed support

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US stock market investors are feeling optimistic about the economy.

  • US stocks rose with the S&P 500 hovering near record highs Friday as investors remain optimistic about the US economy.
  • The benchmark index on Thursday broke both its intraday and closing records.
  • The 10-year Treasury yield was around 1.455% Friday, in a sign that the market believes strong inflation will prove transitory
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US stocks rose on Friday, with the S&P 500 hovering near record highs as investors continue to remain optimistic about the US economy amid support from the Federal Reserve.

The benchmark index on Thursday broke both its intraday record and closing record, to finish the session at 4,239.18.

Tom Lee, managing partner and the head of research at Fundstrat Global Advisors, said the breakout to new highs was presaged by the upside breakout last week.

“Our base case of a surge in S&P 500 to 4,400 before mid-year 2021 remains intact,” Lee said in a note.

While Thursday’s data showed that US inflation surged more than expected in May, weekly jobless claims fell to a pandemic-era low.

The 10-year Treasury yield was trading around 1.455%, two basis points above its March low, in a sign that the market believes strong inflation will prove transitory, as the Federal Reserve has stated.

Here’s where US indexes stood at 9:30 a.m. open on Friday:

Bitcoin was trading at $37,421. The world’s most popular cryptocurrency climbed to a one-week high Thursday, hitting $38,000 as the cryptocurrency shrugged off renewed calls for tighter regulation.

Gold slipped by 0.57% to 1,887.18 per ounce. The precious metal lost some ground as the US dollar rose.

Oil prices fell. West Texas Intermediate crude edged lower by 0.07% to $70.24 per barrel. Brent crude, oil’s international benchmark, was down 0.07%, at $72.47 per barrel.

The International Energy Agency said on Friday that global oil demand is set to return to pre-pandemic levels by the end of 2022, but renewed COVID outbreaks and low vaccination levels in developing countries will make the recovery uneven.

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The Fed will be forced to buy more bonds as US stimulus drives up interest rates, Ray Dalio says

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The ‘king of hedge funds’ Ray Dalio had a nightmarish 2020

  • The Federal Reserve will be forced to increase its quantitative easing program by buying more bonds as interest rates continue to rise, according to Ray Dalio.
  • Dalio believes the recent $1.9 trillion fiscal stimulus bill will spur more treasury offerings by the US government, further damaging the “supply/demand problem for bonds,” Dalio said.
  • In its most recent Fed meeting, chairman Jerome Powell said its current monetary policy is appropriate.
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The Federal Reserve is going to have to revamp its quantitative easing program and buy more bonds to help limit the rise in interest rates, according to hedge fund billionaire Ray Dalio and first reported by Bloomberg.

In a Saturday panel at the China Development Forum, Dalio said the recently passed $1.9 trillion COVID-19 stimulus bill will lead the US government to raise more money by issuing more treasury bonds, further worsening the “supply/demand problem for the bonds.”

That supply and demand problem for bonds will lead to a further rise in interest rates, which has already wreaked havoc on certain parts of the stock market like the high-growth technology sector as the 10-year Treasury yields climbed to a pre-pandemic high of 1.75% last week.

A continued rise in interest rates “will prompt the Federal Reserve to have to buy more [bonds], which will exhibit downward pressure on the dollar,” Dalio said. The Fed already buys about $120 billion in bonds per month.

In a dire scenario, Dalio explained that the world is “very overweighted in bonds” that have a negative yield, and that “not only might there be not enough demand, but it’s possible that we start to see the selling of those bonds,” according to Bloomberg.

According to Bank of America, there is currently $13.7 trillion in negative yielding debt. In the event that bonds are liquidated by investors, “that situation is bearish for the dollar,” according to Dalio.

Despite the concerns, Fed Chairman Jerome Powell said last week that its current monetary policy is appropriate, and pushed back against the idea that the recent jump in interest rates pose a problem to the economy.

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