Biden Nominates Powell For A Second Term

Okay, very good morning folks, it's Tuesday 23rd of November and finally the wait is over. Jerome Powell has secured another 4-year term as the Fed Chair position at the Federal Reserve. So gonna have a look at the charts and digest exactly how the markets reacted. As you might have seen, the Nasdaq sharply underperformed yesterday despite the initial knee-jerk reaction higher. So I'll run through some of the rationale of why that happened, why tech stocks were hurt the most, and why we saw then a bit of a continuation of the sell-off there. But ultimately, what does this mean long term? Is this a top for equities, or is this just a short-term pullback before we then resume the upside trend? And I'll go into— we're also going to talk about oil news, quite a lot coming out obviously yesterday. We've seen from around this time a month ago oil prices are down in excess of 10% or so from where we were trading. A lot of talk of pressure that the US is putting on Eastern partners about potentially tapping strategic petroleum reserves in order to offset then some of the inflationary pressures coming from high energy prices. So I'll give you the latest on that. And then we'll talk about geopolitics, more tensions brewing, um, dual fold really for Biden at the moment. Some more tensions with China, irrespective of old friend kind of dialogue that emerged from a virtual meeting from last week. Friction still pretty high on a potential military flexing of muscles side of things. And same case with Russia as well at the moment and the issue of Ukraine. And then we'll look at the calendar for the week ahead— or the day ahead, I should say. Not forgetting that I'm filming this around 7 o'clock in, in London, and actually we've got the various flash PMIs coming out. Probably by the time you watch this will already be out. Just for future reference, those data points, the flash readings, are always super important. Generally for the service manufacturing sector, they always tend to have a potential influence in the European— for France, Germany to move the euro and European assets, the UK at 9:30, likewise for sterling. And then we'll get the US number, probably lower hanging fruit for the US because the PMI from the ISM really dominates on that side of the pond. But nonetheless, just, just going forward, the morning of a flash PMI, you should always have your wits about you if you're a participant in the intraday market. But having a look at the overall charts this morning, and we've had a little bit of a pullback pullback of around a third of the gain that was seen in the dollar yesterday after the announcement of Powell. And so we're getting a little bit of light reprieve for the major currency pairs, EURUSD and Cable just coming off their lower levels. You can see here Cable just coming up to the top end of its area of kind of consolidation that was seen overnight, the APAC session, finding some resistance at around the pivot, which as you can see here was also that low we printed back at the end of last week. EURUSD, pretty similar setup as well. Top left, as you can see, just coming back up to around that previous area of inflection in the short-term price action from yesterday, as the dollar just pushing back a little bit. Overall though, we did see dollar strength and yields move higher yesterday. Overnight swaps jumped, would be indicative now of the market pricing in a 25 basis point rate hike from the Fed and the earlier timing of June. Meeting, with a second rate hike now priced into November meeting of next year. So some of the rationale here, just before I look at the equity reaction, is the idea then that Powell is the continuity choice. But in summary, he's seen as a little bit more kind of inflation-minded, albeit he's far from a hawk. He's just not as dovish as Brainard perhaps could have been. And thus then the reaction effect, short term at least yesterday, was relief first. And actually, if we think about relief, equity markets in a uniform fashion actually rallied initially, as you can see here. So that's your relief trade. I call it, uh, relief and realization, uh, if you like, if you want to call it that, because then the overall trend overall on the session, certainly for the NASDAQ, has been lower. After we initially shot up. So there's relief, continuity, the uncertainty is over. And even though it was a two-horse race and they're fairly similar, generally, more broadly speaking, the idea is then the kind of confirmation of it was a sigh of relief. The overall sell-off then came because of this more idea of the— it means the Fed can pursue then its, its current guidelines of tapering. We've had lots more comments. You've had Fed member Bostic speak overnight. So this was another of the latest Fed voting, voting members. And he said last night the US central bank may need to speed up removal of monetary stimulus in response to strong employment gains and surging inflation, allowing for an earlier than planned increase in interest rates. And remember, this follows the likes of Clarida, Waller, Bullard, all that spoke at the back end of last week. So the Fed is shifting and becoming more hawkish with some of the inflationary prints that we've had. And we've got things like PCE coming out this week, which of course will be incredibly important. But we have the CPI, of course, more recently at that elevated 6.2% multi-decade high. So the market's perception now is that the rate hike kind of trajectory has got quite aggressive. For me, perhaps a little bit too aggressive. We seem to have been here again and again and again in regards to the idea of pricing in rate hikes too quickly, and it's almost like a knee-jerk reaction to then kind of fade that pricing a little bit as the Fed are going to tighten, but perhaps not at the pace that the market expects. But obviously tech stocks feeling the brunt. The Nasdaq actually finished down 1.25%. The Dow was flat. The S&P was only down a third. And this goes to that point of how growth stocks, tech stocks, which tend to benefit better during a low rate environment, the fact that yields were popping higher really weighed on that sector in the technology space. One thing is, if you flip the, the NASDAQ onto a daily chart, I think it's really important to just look at context. You know, as much as aggressive a move yesterday, particularly in the— into the closing bell on Wall Street, might have felt, if you actually look where we are in the NASDAQ, I think we could easily come down another 1.5%, and I don't think that is still any grave cause for concern, quite frankly. I mean, that would just bring us back down to the 16,000 psychological level and that kind of route of price action that we had back about 10 days ago in the kind of 11th, 12th of November. And even lower down, further support would be seen at 15,750, which at the time would probably feel quite heavy. And I'm sure some of the bears will be salivating somewhat on a 6%, so in excess of 5%, pullback. But again, just look at the context of where we're at at the moment. I think short term. I still don't detract from the point that, sure, this is a bit of a negative reaction thus far and we could go even further, but that doesn't make me feel bearish in the slightest at this point. For me personally, as you would imagine then, in step with just generally some of the dollar movement and yield movement, gold also saw a considerable move lower yesterday. You can see this here from this breakdown in price shortly after the announcement of Powell, and we dropped down to really the $1,800 level where we thrashed out now a double bottom to keep an eye on as far as support for the, the period of consolidation we are now in between $1,800.03 and $1,812.50 at the moment. On a daily chart then, just counteracting some of the recent trend that we've had through the month of November thus far and just pulling back down in that area of what was consolidation through the latter part of the summer period. Following the Powell announcement. Yeah, so that was the overall take. I mean, other things I'd say I'd mention are this. So as I've just talked about, traders are now bracing for a more hawkish rate cycle. But one thing I'd say for me, you know, as the headline suggests, Powell picks seen as positive for risk despite knee-jerk sell-off. And I, I totally agree. I think that the dust will settle on this. As I said, even if the Nasdaq sees some further downside short term, I think overall that this is a continuity play, and I think the markets will like it. I think Powell has proven to be very consistent with his message and delivering upon that in terms of forward guidance and execution of that in a policy perspective. Comments out of JPMorgan, they kind of summarize it as Powell's reappointment reduces uncertainty and hence should be a positive for risk assets. Historically, markets try to test new Fed chairs, and they believe this outcome now will be obviously avoided. Additionally, Powell's experience from the second half of 2018, where policy tightening contributed to a strong market sell-off into year-end, will likely result in a more cautious approach to liftoff next year. So he's had the benefit of experience, is what they're saying, and I agree with that. So yeah, overall, I think personally, I think the move yesterday was maybe a little bit overdone. But what I'm saying is that doesn't detract from the point that even though the dollar might fade a little bit of the pump yesterday, that directionally, the dollar probably is still going to appreciate over time. And that being because of that central bank policy divergence that we're seeing. I mean, the Fed, the Fed are tightening policy for sure in the period ahead. And ECB are going to remain static. Um, and if we go back to the EURUSD chart, obviously this is when we're looking at a daily continuation. We had that breakdown from 115. It's been fairly one-directional in a sense, and we're now down to close proximity, 40 pips in the 112 handle, which was that bottom end of the price action we had in June of 2020, which is the overall area of target for those more medium-term shorts that have been in play. Given the expanding divergence of their policy kind of timing at this point in time. All right, some other headlines there to get you up to speed on. Now we're all clear on, on Powell. Um, before I talk about oil, just a quick mention. If you go to amplifyme.com/market-maker, I'll drop the comment in the, the video in the comment section. You can just put in your email and you'll be automatically added to our distribution list. Which is a daily email that I put out, really short, 3-4 minute read, but just dissecting, say, a major market topic of the day. And it'll also give you access as well, shortcuts to the, the latest podcasts when they hit as well for Apple, Spotify, Google, and the rest. So do check that out and feel free to subscribe. Otherwise, looking at oil, yeah, quite a few comments of late, and oil has— we'll bring up the oil chart as well. Oil's seen some significant movement of late. If you look at more short-term, obviously, as we were coming in towards the back end of last week— so this would have been last Friday, um, going into Friday morning— we broke through this kind of trend line, quite heavy selling pressure, and we've remained lower still since that point. We're trading around the 76 handle, just hugging the pivot in today's session. On a daily chart Um, yeah, daily chart first, let's say. Um, this is looking at the October-November price action, and actually if you look at where we've come from, which was around this time a month ago, we have traded down in excess of 10, almost 12.5%. So it's been a meaningful move. But again, just like the equity market, I think if you look on a weekly bar, so this starts to encapsulate the multi-year picture And, you know, we've just been on such an incredible run since really November of last year, and we've come all the way up to now price back at a level that's been quite key strategically. You can see going all the way back to 2011-12, also 2018, the peak of 2021, which really helped exacerbate the kind of power of the breakout that we saw in September. We're back down to around those levels, so A little bit of moderation in price, again, I don't think is too unwarranted. And I don't think is too much cause for concern at this point that oil is going to dramatically sell off. But all eyes peeled. I mean, obviously, from a demand side, COVID is picking up quite rapidly across mainland Europe, which is going to impede economic kind of activity and mobility all the way from Germany, Austria, Netherlands, France, Spain, Portugal, Ireland. So the whole euro area is going to be impacted. Case rates in the UK are still to be monitored at this point. And this all obviously coming in the northern hemisphere as we go into the winter as well, which typically would lead to potentially a higher degree of case rates with greater chance of transmissibility of the virus. But looking at oil overall, what people are talking about then, and on the supply side, that's going to be very key. Is what's going to happen with the US. Biden, we know, is under tremendous pressure to try and offset then rising inflation because inflation— so far retailers like Walmart, Macy's, Kohl's, we saw their numbers come out last week and they were pretty decent. So there's still demand from the consumer irrespective of heightened inflation currently and rising inflation expectations for the future. Now, that's all well and good that the retailers are performing now and the consumer is kind of making its way through, but that's probably not going to last forever if prices remain as elevated. And, and energy prices is a key component of that. And so Biden's been heaping pressure on, as we know, the likes of the Middle East Gulf producers, but also others as well. And so the latest here is that White House officials last night said there's been no decision as yet about the release of oil reserves. And this follows comments we had on Monday that President Biden is set to announce a plan to release reserves from the Strategic Petroleum Reserve, the SPR, um, and that could come on Tuesday and be in tandem with the likes of China, India, Japan, and South Korea, according to unidentified people familiar with those discussions. Now, a Reuters report has come out overnight, and they've talked about a so-called swap from the SPR to be announced today. And under that swap agreement, um, oil companies would take crude oil from stockpiles but are required to then return it or the refined product plus interest. Swaps typically offered when oil companies face a supply disruption like a pipeline outage or damage from a hurricane. Outright then just selling from the stockpile is much less common. So that's what's being talked about at the moment. Um, to note then, as per this headline on Bloomberg, OPEC delegates said yesterday that the release of millions of barrels from the inventories of the biggest customers is unjustified by current market conditions, and that the group, i.e., OPEC Plus— so this is namely people like the US, sorry, like Saudi Arabia, Russia in particular, they might have to reconsider their plans to add more oil production when they meet next week. And just to remind you, remember, OPEC now meet at the moment every month rather than on a 6-month period as they would do historically. That's because they're adapting to market conditions more frequently because of how fluid the situation economically is under the post kind of pandemic recovery. And their predetermined path is they're going to return 400,000 barrels per day additional, bringing on new supply, but in a very kind of cautious manner as they monitor developments and things like, you know, mainland Europe. Don't forget that many provinces in China at the moment are taking a zero policy lockdown approach, and that also is going to impede the likes of energy demand at this point. So there's quite a lot at play there. Uh, in actuality then, we'll keep an eye on things today. Certainly confirmation of this could well create a little bit of a short-term intraday reaction, but the price, as you've seen, has already kind of repriced from Friday, dropping again quite substantially to reflect a lot of the things that I've just been talking about. Um, so yeah, it definitely is going to put a strain on some relationships. And one of those relationships then flips over to the geopolitical front, and the Biden administration is reportedly mulling sending military advisors and new weapons to Ukraine. This comes as Russia builds up forces near the border and U.S. officials prepare allies for possibility of another Russian invasion, according to CNN last night. This morning The US said Russia is close to using energy as a weapon in Europe while it imposed further sanctions related to the Nord Stream 2, with sanctions imposed on Russian-linked entities and its vessel, according to the State Department. So it's a very complex situation here because this is kind of US-led. I'm sure the likes of Germany would be very much more cautious approach to sanctioning of the Nord Stream 2 pipeline because that's one of the things of which Putin's decided to play ball in recent weeks to offset the emerging energy crisis that's being experienced in Europe by opening up the tap and supplying more, of which much of mainland Europe is heavily dependent on. And then the US are kind of getting quite heavy-handed now, talking about their military involvement, uh, and so on and so forth. So yeah, definitely quite a few things to keep an eye on on that front. Otherwise, in other news, um, just two other small things that aren't massive but to be aware of. The German coalition is set to announce then that they've formed an agreement either today or tomorrow. Olaf Scholz, the SPD's candidate, will be the next chancellor, and Christian Lindner, the head of the FDP, is set to be the next finance minister according to sources close to those talks. And then Overnight as well, according to the Global Times newspaper, the kind of state-backed newspaper in China, they've talked about the country is likely to adopt another reserve requirement ratio cut before year-end to cope with the economic slowdown, although the loan prime rate is unlikely to change at this point in time. So that's the latest. Okay, so quick look at the day ahead, and in fact I think we've just had some PMI data hit the tape. So the actual French November flash services PMI just come out now, 58.2 versus expected 55.5. So it looks like a pretty firm reading there on the service side for, for France. Um, just coming into the calendar then, we get the various different PMIs through the morning. So the German figure will follow at 8:30, Eurozone at 9:00, UK 9:30. We'll get the US version of that at 2:45, um, and then the weekly oil inventories at 9:30 from the API as normal. From a speaker perspective, Bank of England's Haskell speaks at 11 AM this morning, and then you've got Governor Bailey appearing at the House of Lords hearing on central bank digital currencies this afternoon at 3 PM, with ECB's Di Guindos speaking in the evening. And President Joe Biden is due to speak on the economy inflation today, but time to be confirmed at this point. Um, so do look out for that. And then in fixed income space, the main one is $59 billion in 7-year note auction, usual time results due just after 6 PM London time. So yeah, just to recap, the services PMI in France just came in at 58.2, above the expected 55.5. The manufacturing figure, 54.6, also stronger than expected. Um, 50 3 as well. So look out for the German numbers shortly. All right, that is it. Let you guys get on with the day. Take care, and I'll see you same time tomorrow.