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Mnuchin Made Certain We Wouldn’t Get A Santa Rally In 2018

January 2, 2019 Blog

‘Twas the night before Christmas and rather than St. Nick and sugar plumbs, we got Treasury Secretary Steven Mnuchin and lumps of coal. The Dow dropped a whopping  3 % on Christmas Eve. It hasn’t done that since – ahem – 1918!

Following the bruising stock selloff, which erased more than 650 points from the Dow, Treasury Secretary Steven Mnuchin tried to instill calm into a jittery market.

With the selloff showing little signs of slowing, Mr. Mnuchin attempted to reassure investors. While he was vacationing in a resort in Mexico, he released a statement that said he had spoken individually with the chief executives of six large banks to ensure that they had sufficient lending capacity.

It turned out to be one for the blooper reel.

Mnuchin’s announcement that he held phone calls with the CEOs of the U.S.’s biggest banks to discuss the sufficiency of their liquidity levels caused severe investor alarm, according to a MarketWatch report. Few had been worried about bank liquidity, a key reason why stocks nose-dived in 2008, or had seen it as a factor in the ongoing stock-market skid.

Then, the administration flip-flopped. A senior Treasury official reportedly told CNBC the calls in reality had nothing to do with bank liquidity.

Indeed, Mr. Mnuchin’s public efforts to soothe investors may have had the opposite effect.  We should probably expect more such gaffes from this administration in 2019.

“We’ve gone through situations before where it’s absolutely normal for the secretary of Treasury to reach out to the private sector,” said Quincy Krosby, a chief market strategist at Prudential Financial, who also served several stints in the government earlier in her career.

“But what’s bad is this made the papers, and says the government is very worried,” said Ms. Krosby to the Wall Street Journal. She added that with investors focused on so many issues, “it’s almost as if gravity is pulling this market toward a lower level before it bottoms out.”

Adding to the market’s unease were reports over the pre-Christmas weekend that President Trump, angry over monetary policy, has considered removing Federal Reserve Chairman Jerome Powell – a move that would stir even greater volatility and raise questions around political interference at the central bank, analysts said.

Since the financial crisis, investors have wailed at the lack of brisk trading in bond markets after primary dealers were forced to cut back on their inventory of fixed-income securities under new regulatory provisions designed to make the banking system safer. As a result, bank’s trading desks have struggled to keep markets ticking in the way investors were used to.

“The positive is banks are probably healthier, the negative is you’re not going to have fully functioning markets,” said Jody Lurie, corporate credit analyst for Janney Montgomery Scott, as quoted by MarketWatch.

The lack of liquidity in the bond markets is reminiscent of the turmoil in the Puerto Rico bond markets in the fall of 2013. This led to an avalanche of investor losses and investment fraud lawsuits.

Mr. Mnuchin spooked the markets rather than calming them. No doubt his administration will be tested throughout the New Year. Let’s all hope it will do better.

Zamansky LLC is a New York law firm which represents investors in court and arbitration cases against securities brokerage firms and issuers.  The firm may represent investors in cases against companies mentioned in this blog.  Zamansky LLC also represents investors in arbitration cases against UBS and other brokerage firms regarding Puerto Rico bonds and UBS closed end bond funds and other investments.