SANTA INTERRUPTED
Money Market Woes; NY Fed Interventions; Extraordinary Measures; Recession Call Reminder
»CLUB/EDGE client post December 30th, 2024
A reminder: The Santa Rally is defined as the statistically bullish period during the last five trading days of December and the first two trading days of January.
And to date, the market sold off into Friday the 20th, reversed and rallied Mon & Tues, stalled Thursday, sold off Friday. We still have another week of this!
Money Market Woes & NY Fed Interventions
On Wednesday, December 18th, SPX sold off -3%. [Reminder why here: FED DAY - HAWKISH CUT}
The selling came on the heels of FOMC adjustment to its future (2025) dot plot pulling out two rate cuts. It is also the day the FOMC lowered the rate on reverse repos to match the lower end of the funds target - from 5bp above.
Both contributed to money market stress, for which this article published the next day (Dec 19th) addressed: The Year-End Money Market Storm
In it, @conksresearch highlights a resurgence in riskier paper funding a resurgence in riskier leveraged equity longs.
It's a lot of equity repo plumbing, but suffice it to say it is the grease (liquidity) that has driven the market's advance in 2024:
(emphasis mine)
For the past year, market makers have financed numerous baskets of large-cap stocks to meet the insatiable demand for longs. An intense craving for stock market exposure and a subsequent rise in price has boosted volumes of equity repos on the BNY’s (Bank of New York’s) triparty platform. Dealers fund some client positions by purchasing stocks and pledging them for cash in repos, paying an overnight rate until they no longer need funding. While dealers have met the need for longs from hedge funds and other investors, a plunge in short-selling activity has hindered the securities lending market, where dealers usually earn a spread for loaning equities from their inventories to short sellers. Instead, massive demand for not just longs but leveraged longs has forced market makers to charge a colossal fee, sometimes 100bps (1.00%) or more above SOFR, to warehouse equities on their already crowded balance sheets.
...
Simultaneously, a mammoth increase in issuance and an undesirable yield curve have reduced demand for U.S. sovereign debt. Unlike equities, the Fed’s primary dealers serve as the private sovereign debt buyers of last resort and must absorb the largest amount of unwelcome inventory on record. In the secured standard, providing room on your balance sheet is already costly. But now, the supply-demand imbalance in multiple markets has caused the scarcity of funding to reach precarious levels, just as we approach the most restrictive period on the financial calendar. A stormy year-end is looming.
But here's where it gets really interesting…
The SAME DAY the above post was published - again, which happened to be the day after SPX had its -3% drawdown with VIX surged 74% - the NY Fed backstopped the money markets!!