Thursday, July 28th, 2016

Fed rate cuts

Well in a co-ordinated move with European Banks Feds slashed rates today. The Fed reduced its key rate from 2 percent to 1.5 percent. Bank of England cut its rate by half a point to 4.5 percent and the European Central Bank sliced its rate by half a point to 3.75 percent. Meanwhile Iceland is about to go bankrupt as its banking system has collapsed. This has been one gigantic meltdown starting with US real estate market woes and subprime mess.

Around the world, central banks of China, Canada, Sweden, and Switzerland also cut rates. The Bank of Japan said it strongly supported such actions but did not cut rates.

“The recent intensification of the financial crisis has augmented the downside risks to growth,” the Fed said in explaining the coordinated action. Although the inflation threat is real, the recent drop in energy prices and weaker economic metrics have mitigated that threat to a lesser degree.

Well, Feds simply had no choice, but to pull the rabbit out the hat like a last act of a magician’s show. World wide collapse of financial markets in Japan, Hong Kong, India sent ripples throughout the world filled with doom and despair. Its has been a miserable few weeks I have seen in last many many years. Roller coaster rides and brutal market plunges marked by sharp rallies and waterfall sell offs. It has scared buyers and investors into side lines.

We have been doing the same thing. Have no trades for October expiration. Index options trading, options strategies for income, stock market trading all have substantial risk. Iron condor trading and credit spreads do not function well in these extraordinary markets.

But the rate cut did not seem to please Mr. Market today. There is these stop and go rallies. Usually the markets rally the next day after the Fed rate cut. At least if you go back and look at the daily charts on SPX you will see those dates and a day later huge spikes. So if market behavior is any guide, we should expect a rally tomorrow ? Let me know what you think….

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