Goldman Against The Grain 🌾

by | 11 Jun, 2019

Goldman Against The Grain

2019 has a lot yet in store, but not a drop in US interest rates if Goldman Sachs is to be believed. The Wall Street voice chimes in as investors price in the cut, which would elevate stocks and get investors seeing green.
Last week, Chairman of the Federal Reserve, Jerome Powell, threw the market a bone with his commitment to “act as appropriate to sustain the expansion” of the economy. Jan Hatzius, the chief economist for Goldman Sachs, admitted that while it was “still a close call,” signals have likely been misinterpreted by investors with all their chips on the “inevitable” rate cut. One look at the derivatives market exposes these raging bulls.
Let’s quickly untangle a derivative. Essentially, two people find something they disagree about – preferably finance related! The two people write a contract between them, where each has to pay the other some amount of money in the future tied to that thing they disagree about. Each is betting on it going in various directions, and to the extent to which it does, one party wins and one party loses! That’s a derivative. And with all attention on interest rates, such markets have priced in a whopping 84% chance of a July cut. Goldman isn’t so confident.
UBS has sided with the bank on this matter. But another bank, Morgan Stanley, also weighed in on the topic yesterday. It’s equity strategist, Michael Wilson, suggested that even if rates were cut, it “may be too late” to stem a crash given the daily trade damage. For those of us without crystal balls, this one’s too early to call.

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