The CME Group Fed Watch suggests now that traders are betting even more aggressively on a very large rate cut on Tuesday. As it stands no traders are betting on a move smaller than (-100bps)! Previously the split in traders was 48% for a (-75bps) cut and 52% expected a (-100bps) cut. Tonight it has shifted to 78% for a (-100bps) cut and the minority at 22% expect a (-125bps) cut. The Fed is not in a position to disappoint markets. With the consensus now at a cut of (-100bps) this will no longer be a surprise to markets but anything smaller would. It would however get the US dollar going to the upside if the cut were smaller than (-100bps).
Risk is a two-sided game as we all know. Tomorrow we have two of the biggest names (left) on the Street reporting much anticipated earnings - Goldman Sachs (GS) and Lehman (LEH). The risk with these names since the front of the year has of course been being overly bullish. LEH is down (-59%) year to date and GS (-32%). Those are mighty short haircuts. If news tomorrow is not the horror show that is currently priced in we might well see risk shift the other way, to the upside.
The cover would likely come right off the ball especially if guidance is better than expected. For LEH the issue is going to be reserves, liquidity and solvency. For GS it is the size of the expected writedown with some expecting as much as $3.5B. If either company does a convincing job of reassuring the markets we would at the very least expect today's gap downs to be closed with large upside potential thereafter.
Sentiment in this group and in the markets in general is abysmal. In such environments it often does not take a lot to get a party started.