Critical Systems

Some of the Fed’s critical systems went down on Wednesday.

But not the ones that buy stocks. They were fully operational.

I’m just kidding. I mean, not about the outages. There were outages. Specifically, in the Fed’s interbank payments systems. FedACH had problems, which isn’t great.

There was an “operational error,” according to a spokesman for the Richmond Fed. No foul play was initially suspected. It wasn’t Colonel Mustard in the library with a candlestick. And it wasn’t Ivan Drago in the Eccles with the Novichok, either. Or at least as far as anyone knew.

Stocks in the US staged another dramatic comeback Wednesday. Once again, the dip-buying coincided with boilerplate remarks from Jerome Powell, who spent a second day chatting with lawmakers. On Tuesday, equities recovered steep losses to close marginally higher. A day later, they recovered modest losses to post fairly large gains.

“Powell’s view is that having been in the COVID trenches, now is not the time to start waving the victory flag and allow the rates market to sabotage the recovery,” AxiCorp’s Stephen Innes said.

The move in stocks ultimately overshadowed another spike in yields that pushed the 10-year higher by nearly 10bps at one juncture to ~1.43%. 30-year yields rose even more at one point.

Treasurys eventually pared losses, but the early selloff served to wipe away another chunk of the pandemic-era decline in yields. Dare I say it, but 1.50% is now in the picture.

Apparently, foreign real-money started buying in 10s, while central banks bought the belly and front-end. Treasurys are beginning to entice buyers, as some suggested they would on any additional cheapening.

Some are fine with applying the “tantrum” label. TLT has seen virtually all of its pandemic gains evaporate. For any brave home gamers looking to catch a falling bond knife, this is your chance to get a finger sliced off.

“Here’s a wild one: The UST cash 5s30s curve has now retraced 50% of its entire flattening since 2010,” Nomura’s Charlie McElligott marveled, in a Wednesday note. “It’s possible that the ‘fiscal bazooka’ is finally acting to cheapen USTs more than QE richened them,” he added, citing a colleague, and noting that clients might be “pulling forward their tapering expectations.”

In another testament to the narrative gripping markets, the banks index hit the highest since May 2007 on Wednesday. As I wrote in “Bank On It,” the last time banks were feeling this good about life, BNP was still three months away from freezing the hodgepodge of ABS funds which effectively marked the beginning of the subprime crisis.

But there’s perhaps no better indicator of the “fade” in the pandemic trade than Zoom, whose shares have fallen for six consecutive sessions. That’s a first. A price target cut from Rosenblatt didn’t help.

If you can’t count on Zoom, what can you count on?

Banks and energy, apparently. Oh what a difference an election, more stimulus, Janet Yellen at Treasury, and a handful of vaccines makes.

A quick look at the energy ETF shows the product is on track to post a 28% gain in February. That would be remarkable enough on its own. But consider that should it manage to hang on to gains logged over the past couple of weeks, it would mark the second month in four that it’s posted such a mammoth move.

Oil hit a one-year high Wednesday, as the market pondered a prospective surge in demand tied to reopening and dwindling stockpiles. Both Goldman and Morgan Stanley lifted their Brent targets this week and now, BofA is talking about $100 crude, or at least fleeting spikes into the triple-digits over the next several years.

10 months ago, you’re reminded, oil was less than worthless (see the surreal throwback visual below).

In any case, Wednesday marked another victory for the dip buyers. Another “all’s well that ends with stocks higher” session.

If realized volatility stays low, it’s not difficult to imagine further upside. “Low volatility drives inflows, triggering a positive feedback loop of a rising market and declining volatility,” JPMorgan’s Marko Kolanovic said Wednesday. “Despite some warning of a ‘VaR shock’ what we are seeing now is ‘VaR inflows’ with volatility targeters/risk parity funds adding (rather than reducing) ~$1.5 billion in equity exposure daily [and] gamma hedging reducing S&P 500 volatility.”