Stocks Flat on Eurozone Recession Fears; Fed Committed to $1 Trillion Liquidity Injection

Stocks gained early and faded late as poor economic data from Europe dampened the mood on Wall Street at the start of the last week of the third quarter.

Eurozone manufacturing PMI fell to 45.6 on Monday, the worst reading in nearly seven years, with the German manufacturing PMI falling to 41.4 in September from 43.5, the worst number since the fall of Lehman Brothers sparked the global financial crisis.

The poor figures sent European stocks reeling, fearing recession, especially in Germany, Europe's powerhouse, could be right around the corner. US indices were less-affected, though the Dow Industrials was the only index to post a positive close.

At the same time, the US banking system was being monitored, as the Fed continued its series of repo auctions. In this statement from the New York Federal Reserve, the central bank committed to 1.05 trillion in overnight repo auctions through October 10, and at least an additional $90 billion in two-week term repo auctions.

The sudden appearance of repo auctions, with the Fed buying back treasuries or MBS in exchange for ready cash from (supposedly) primary dealers has economists on edge, especially considering the huge amount of excess reserves clogging up the system.

Those not so alarmed point out that these extraordinary repo auctions are the result of a highly-predictable cash crunch for banks as corporations tax payments are due at the end of the quarter. This causes a drain on the system overall, though there was no need for such measures since the Lehman debacle a decade ago.

What happens next in markets is probably more volatility and sideways trading due to uncertainty. Recession fears in the Eurozone are probably real, though the US may actually be in good enough shape to avoid a significant downturn through 2020. The Fed has cut rates twice this year after raising them by decidedly too much. Political forces are bound to keep the Fed honest and operating largely at the behest of the markets and President Trump, who has loudly criticized the Fed's step-behind operations.

At the Close, Monday, September 23, 2019:
Dow Jones Industrial Average: 26,949.99, +14.92 (+0.06%)
NASDAQ: 8,112.46, -5.21 (-0.06%)
S&P 500: 2,991.78, -0.29 (-0.01%)
NYSE Composite: 13,085.33, -8.47 (-0.06%)

Weekend Wrap: Cash Crunch Easing, Though Culprits Remain Anonymous

Ending a streak of three consecutive weekly gains, all major US indices took an about-face when Friday's quad-witching day sent stocks South.

Losses were not large, though they were widespread, as fear of a looming recession and confusion over the Fed's four straight days of repo auctions took away market enthusiasm.

Make that five straight days, as the Fed held another $75 billion repo auction on Monday, prior to the opening of equity markets in the US. Signs that the cash crunch was easing, only $66.75 billion was accepted as collateral by the Fed, making the auction officially undersubscribed.

On Friday, the Fed had also announced that it would conduct overnight repo auctions every day until October 10, and additionally would provide three 14-day term repo operations for an aggregate amount of at least $30 billion each, Tuesday, Thursday, and Friday of this week.

While nobody is certain which banks - or single institution - is having a hard time balancing its nightly books, any sense of panic has been effectively blunted by the Fed's actions.

As markets open the final week of trading for the third quarter, it will be instructive to note how markets respond, especially on Thursday and Friday. With the close of the quarter, some firms traditionally buy stocks in favor, as so called "window dressing," though it appears that this quarter might have a wholly different tone, given the stress in the system.

In what could be a most important week for markets, any words from Fed speakers should also be quantified in relation to ongoing cash shortages and the global condition.

At the Close, Friday, September 20, 2019:
Dow Jones Industrial Average: 26,935.07, -159.73 (-0.59%)
NASDAQ: 8,117.67, -65.21 (-0.80%)
S&P 500: 2,992.07, -14.72 (-0.49%)
NYSE Composite: 13,093.80, -17.50 (-0.13%)

For the Week:
Dow: -284.45 (-1.05%)
NASDAQ: -59.04 (-0.72%)
S&P 500: -15.32 (-0.51%)
NYSE Composite: -30.54 (-0.23%)