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If there is one thing the events over the past two months have proven beyond a reasonable doubt, it is that when it comes to risk prices, only one thing matters - not fundamentals, not political risks, not earnings forecasts, not squiggly lines on charts, not opinions about the economy or even inflation and interest rate forecasts; Nope - the only thing that truly matters is how much liquidity is being generated or drained by the Fed at any given moment.
And as we get fresh signals of economic slowdown both in the US and abroad - with Germany now on the verge of recession - coupled with a sharp drop in projected corporate profits...
S - P - Trading - Days - YTD
... the S&P has continued to surge, up on 18 out of 24 trading days so far in 2019 with YTD gains of +9.20%, with Deutsche Bank noting that only 5 other years in history have matched or beat this in terms of least number of negative days to this point in the year. 1954, 1961, 1965 and 1971 saw the same number, while only 1967 saw less negative days (5) through February 5th. Said otherwise, the S&P is now up +16.43% since its Christmas Eve trough, advancing on 21 of 28 days since then. That’s the best such streak since November 2017.
What is behind this remarkable rally that has ignored both what is at best a mediocre earnings season, a drop in Q1 EPS forecasts amid broad profit warnings, and dismal economic news? According to Nomura's Charlie McElligott the answer is simple: Fed "rate cut" bets are accelerating again, with Eurodollar curves flattening powerfully overnight after the past few days of US data "misses."
Nomura - Strategist - Explains - Note - Profile
As the Nomura strategist explains in his overnight note, "the profile move overnight is the reacceleration of ED$ curve flattening as “Fed rate...
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