Various Thoughts

1. When traders learn a pattern over an important event (FOMC meeting) and prepare for that event as if things will repeat, then the pattern is less likely to work.  The pattern was to sell ahead of the FOMC meeting and buy the dip a few days later after Powell disappoints and Trump ignites trade war angst.  

Ever since Powell has been FOMC chair, the performance of the S&P has been weak, much weaker than an average trading day.  But this time, Powell disappointed with a rate cut and no promise of future eases or repo facilities or whatever else the market dreamed of.  After the initial fakeout dip to draw in the Powell bears, we had a face ripper into the close.

2. One of the most popular hedge fund trades is to bet on an extended rate cut cycle via long Eurodollar futures and call options.  The December 2020 Eurodollars futures contract settled yesterday at 98.45, which is pricing in a LIBOR rate of 1.55% at the end of next year.  LIBOR-OIS spread is usually between 10-40 bps, with occasional spikes higher above 40 bps.  So assuming about a 25 bps spread, that is pricing in a Fed funds rate of 1.30% by the end of 2020.  

With the current rate at 1.88%, that's pricing in about 2.3 rate cuts (58 bps) over the next 15 months.  While I don't disagree with the long Eurodollar futures trade, a better way to make that bet would be to just go long 2 year Treasury notes at 1.74%.  If the Fed cuts 58 bps, the Eurodollar trade breaks even.  However, the 2 year note yield would definitely trade much lower than the current 1.74%.  

3. A lot of traders and investors are reluctant to be long stocks and are long bonds because they fear a recession in 2020.  I don't agree about the recession call for 2020 because of the lack of overcapacity, lack of commodity inflation, and the huge budget deficits providing a lot of fiscal stimulus to the US economy in the background.  But I do agree that being long stocks is a bad risk reward now, not because of recession risk, but because of high valuations, no earnings growth, and political risk.  Political risk is not the trade war, but the risk of Elizabeth Warren becoming the Democrat nominee in 2020, with betting odds favoring her to beat Trump in the next election.