We’re still only a few days into 2020 but a very reliable trend has already emerged and bears watching. The trend: No matter what happens anywhere in the world or even if markets flush a quick 50 handles in overnight (i.e. on the recent Iran mini crisis) by morning all is well. Why? Because the Fed’s daily liquidity injections are filtering into market behavior every single day and you can see it in the chart action.
Every trading day this year the Fed has unleashed repo operations of varying size in premarket. These are the daily liquidity injections the New York Fed provides in overnight repo markets to keep overnight rates artificially suppressed and to meet rising demand of banks for liquidity. The temporary liquidity crisis has apparently become permanent.
What do you call all this? Some call it a subsidy:
— Lisa Abramowicz (@lisaabramowicz1) January 14, 2020
I call it a perversion of financial markets. Why? Because it has now become permanent and it distorts everything.
See here’s the thing: Every day is the same. Whether markets open down (up mostly) the ample liquidity appears to make it immediately into markets.
The New York Fed publishes its running repo operations and sizes for each day on their website. You can see the daily operations there every day.
All these operations occur prior to US market open, and then lightning strikes. Spot the trend:
Each market open gets vertically jammed higher. The only obvious exception was the first trading day of the year, also the smallest repo operation of the year. Initial selling came in, but not to fear, the lightning effect took hold after all with a vertical ramp into close.
Correlation does not necessarily equate causation, but we can observe regular, get me in at all cost,