Rumors Drag Down Markets Going Into Weekend

The old adage “buy on the rumor, sell on the fact” was turned on its ear today as rumors fueled the tanking of gold and silver; equities in the U.S. and Europe; and crude oil.

Lael Brainard, who is a Federal Reserve governor (a non-rotating position) is going to speak on Monday in Chicago. Brainard is one of the very quiet, deeply intellectual and deeply influential members of the FOMC, which will meet in eleven days.

Brainard is also a steadfast dove when it comes to rates. The jitters the mere announcement of her speech caused rest on the fear that she may say something that could be interpreted as vaguely hawkish. We do know that Brainard has referred to hopes that the Fed could normalize monetary policy (whatever that might mean). To us, "normalized" means keeping rates in line with what the Fed’s goals are and what data dictates. Nevertheless, we interpreted her remarks regarding normalization as generic rather than targeted.

What she might say on Monday is anyone’s guess, but we believe she will not say anything unsettling. Here’s why. Monday is the last day before the Federal Reserve’s statement blackout period that leads up to an FOMC meeting. Brainard, who is a champion of cheap money when necessary, is very sober and low-key.

It’s hard to believe she would rattle the markets for a full seven business days during which no one from the Fed could repudiate or expand upon her remarks.

Be that as it may, we are left with the rubble from the rumor bomb.

The U.S. dollar rose on the Brainard rumor, but it also strengthened because of another nuclear test by North Korea, which rattled world markets.

The stronger dollar weighed on gold and silver, accounting for a bit more than half of the drop in gold but only a small portion of silver’s 2.60% fall. (Regular trading in silver pushed it down 2.25% on its own.)

The Dow Jones Industrial Average had fallen more than 3.00% at one point but has since come off those lows and is looking to close off 2.00% or thereabouts. The big drop came immediately after the Brainard announcement. The S&P 500 and NADAQ were off about 2.50% each.

Oil, which had risen precipitously yesterday, fell just as quickly and steeply today. West Texas Intermediate was down 3.65% and Brent North Sea was down 4.20%. 

While general market uncertainty stung crude, it seems the rise of seven more rigs in the U.S. count was a more important price driver. U.S. producers may be ready to throw themselves upon the burning pyre of selling at rock bottom prices.

"When a market is quiet, it's susceptible to rumors, whether we're talking about a path to freeze oil production or whether the Fed is going to raise rates in September," said Quincy Krosby, market strategist at Prudential Financial. "This may be a market that has too much time on its hands right now."

Reacting to this uncertainty, the VIX shot up 40% to 17.50, which is the trading equivalent of putting on a fright wig and running through town with a torch in hand.

Interestingly enough, the CME FedWatch probability scale for a September rate hike stayed calm, moving up to 24% from 18%. (Although it has been testing 24% recently on almost a daily basis.)

Wishing you as always, good trading,