Dovish Fed & 2nd Wave Virus Fears

Very good morning, Anthony here from Amplified Trading. It is Thursday the 11th of June, so hope you are well. I'm going to first of all say thank you for everyone for joining us for the live FOMC webinar last night. So for those that did attend, I hope you enjoyed it, hope you found it insightful, and please do check out amplifiedtrading.com for some more information about us and what we do. What we trade and some of our training programs. But a couple of things I need to get you up to speed on. And first of all is the kind of aftermath. Always after an FOMC decision, as much as we were analyzing it live at the time of its release, the morning after is normally time for people to, you know, sleep on it, digest the information that they've had, and you get a bit more of a feel about people's overall perception of what they think they heard the Fed say yesterday. And so I can get you up to speed on that a little bit. We can look at the way the markets have reacted. And then actually there's been some quite meaningful updates on the coronavirus statistics pertaining to the US specifically, where case numbers in a number of key geographic areas with high-density populations which have seen a flare-up of potentially second wave kind of conditions. So that's the other major thing we need to have a look at. And on that point, if we start then by just looking at the overall sentiment at the European Open. You can see here the stock index futures in the center— Dow, S&P, or Dow, NASDAQ, S&P, left to right here. They all have tracked lower in the overnight Asia-Pacific session. So really, even post-Pow, it was pretty choppy actually. The, the sell-off didn't really materialize until really the commencement of the overnight Asia-Pacific session. So yes, Powell, in summary, I'll recover in a second, was overall viewed to be dovish, and certainly equity markets were a little bit indecisive of what to do with that. But the yields did fall, gold did rise, and some volatility, but initially was lower in the dollar, would make sense for that. But overnight in the Asia-Pacific session, it seems to be more— it's flipped towards then the idea that Powell definitely was highlighting considerable risks, and certainly around coronavirus, and then coronavirus in its itself. As I said, there's a couple of indications that potentially we could be seeing quite a distinct pickup in cases in America, which of course would be— markets would be particularly sensitive to. So when you're looking at the charts this morning, I mean, the Dow future is already down in excess of 400 points, S&P 41, the US 10-year is up 6.5 ticks, gold really quite a punchy move here. I mean, it accelerated after the Fed came out on the, the back of the, the dovishness of what Powell was, was saying and the fact that interest rates were going to remain basically at zero through 2022. And we continue to move higher really all the way up into the US session. We've really held that. Gold did see probably the most, I guess, one-directional and most pronounced move on the back of the Fed compared to, say, equities was very choppy. And that often is the case. I think if you're ever going to trade an event like that, you know, you've got to kind of pick your battles and Often equities falls into this kind of category of, you know, is bad good, is bad bad, in terms of the reaction. Do you take it for what it is, or in terms of a potential policy response? And often the yield-gold-dollar move is a little bit more clean in that respect and perhaps more tradable. So yeah, gold's up about $17.50 this morning. It's finding a little bit of support in this top right-hand corner chart. You can see here around the pivot level perhaps an area, a bit of support here. You've got that previous high that we had in yesterday US afternoon just beneath, so the pivot at 38, and that level at 35 here. Elsewhere in the currency markets, the dollar is actually strengthened, and we're up in the Dixie a decent amount actually. So overnight what we've had, remember what I've been saying all this week, is the new kind of correlation that's been quite a focal point for from a, from a risk identification of risk sentiment has been inverse between stocks and the dollar, and reflective then of looking at the dollar as a safe haven at this point. That's exactly what we've had overnight. The equity index futures have fallen, as you can see here in the case of the center charts. And then if I quickly just bring into view the Dollar index— excuse me, my window is just shutting everything there for a second. The dollar index, you can see here, moving higher overnight in basically the inverse relationship. So you can see here, if we're mapping the two on each other, that's kind of a perfect kind of X formation in that, in that sense. So let me just quickly reopen some of my panels here. They just shut down there momentarily. So having a look then at a couple of the news stories, and first of all then let's recap exactly what it was that Jerome Powell said yesterday. And we're going to start with generally the headlines: 'Dubious Fed sees keeping the foot on the gas until jobs come back.' So the Fed maintained Treasuries mortgage-backed security buying at least $120 billion a month. So one of the things that they did do is they put an explicit kind of value on that quantitative easing. The virus continues to pose considerable risks to the economy was one of the main comments that Powell made, and they said they strongly committed to using tools to do whatever we can for as long as it takes. That's not that surprising, it's kind of the reiteration of the usual language. The actual phrasing of the economy facing, quote, considerable risks over the medium term is a reiteration of the language that was used at the last FOMC meeting in April. So a lot of what did happen last night, you know, they, they had some discussions about this idea of yield curve control, this idea of capping Treasury yields out to a specific maturity. They told reporters that such discussions will continue going forwards at upcoming meetings, but they didn't yet kind of deploy that as an option. So a lot of it was expected. I guess if anything, the, the commitment to keep rates low was, was quite a key thing, and the fact that they see considerable risks remains despite then perhaps an overextension of what people were thinking, with markets being like they have been earlier this week and the week before, where we've kind of continued to rally on this kind of almost renewed confidence that the virus hasn't yet manifested itself into a significant second wave. And things have just been on a bit of a tear, and that kind of was peaked when non-farm payrolls came out surprisingly strong. And so perhaps a little bit of reflection then of reality kicking back in, that the Fed are in, you know, dovish and supreme accommodative mode at this point in time. So ultra-loose monetary policy, definitely a positive for gold in that respect. But when we look at these general correlations this morning this isn't so much a monetary policy reaction. This is more of a classical risk-off reaction. And so for me, this is more tied to the infection increase we're seeing in America over COVID rather than specifically that of the Federal Reserve, to some extent. Um, because here you've got weaker equities and a flight to quality into gold, T-notes, and the dollar at the moment. Oil down, yes, inventories yesterday but also as well all the more reason to book some at that recent run-up we've had on that gap fill up to around $40, $41 in the short term as the market kind of reevaluates things and a lot of people in those more medium-term longs look to book some in oil. So back to the headlines, one of the things I just wanted to show you because I know we do have people who are more new to markets that perhaps aren't used to looking at this type of information, but One of the main things that we had yesterday was, of course, the infamous what we call the dot plots. And this is their kind of matrix of where they predict then where interest rates will be at the end of a certain period of time. Not only that, though, we get to have a look at what do the Fed think the kind of outlook for GDP and employment and inflation looks like. And you can see the Fed currently see the US economy by the end of the year being in contraction of around 6.5%, but then bouncing back strongly, growing 5% in 2021. Unemployment they see peaking basically, uh, well, I should say coming back down to, given where we are at the moment, uh, and finishing the year at around 9.3%. And inflation obviously remaining relatively benign as demand is kind of relatively lackluster given the slow reopening of the economy. The important one though, when you're looking at this, so this is the main table from what we call the SEP, the Summary of Economic Projections. And so this is what accompanies every alternate meeting from the Fed on that quarterly basis— March, June, SEP, DEC— when they give us greater visibility about their forward guidance. Essentially, the one that people get hooked on is this one down the bottom, which is essentially when they ask all of these FOMC members who are present in this meeting a simple question: where do you see interest rates in America at the end of each year? And basically they take the current and then the next 2 years and then what they call the longer run, so long term. And what it generated was this, and each yellow dot signifies an individual member of the Federal Reserve. And as you can see here, the interest rate and kind of expectation as far as the Fed are concerned is that rates are going to remain where they are through 2022. So for the next 2 years, we are going to stand pat of where we are at this point in time. And that was a bit of a key signal for markets to take it initially. It was a bit of a dovish reaction. A couple of outliers here that would be indicative of the fact that, you know, you've got some ultra hawks where nearly everyone foresees zero change in rates over that period. There's one individual that sees multiple rate hikes breaking out from the pack, but that means nothing when we're looking at the median in this respect. One of the things I was pointing out at the time is you can see here in the longer term all of the Fed members see, I guess, normalizing of interest rates that would be around the 2.5% region. For me though, you know, this, this dot plot matrix is completely flawed because there's a massive gulf, a gap here of an unquantifiable period of time where, fine, I see that they see over the longer term that a natural neutral interest rate that they would want is 2.5%. But what I'm, what I'm bothered about is then, well, what is the trajectory between 2022 and to getting to that point? And this graphic really tells me absolutely nothing. So Been a lot of question marks, of course, over recent year or two about the validity of a dot plot matrix, given the fact of its high degree of inaccuracy, because trying to predict the future out to what explicitly you think an interest rate will be multiple years down the line is incredibly difficult. So yeah, I wouldn't really get too much caught up into this, to be, to be quite honest. The other thing that Then gold, obviously, you're taking a boost as we said. And obviously we've got to keep an eye on some of these, these, these top-end levels that we were trading through May and also the peak that we saw in April. So, you know, coming up, this is looking at gold futures on COMEX around that $1,750, which we've retested yesterday and backed off again a little bit. One of the things that Powell was of course saying, and you often hear this from central bankers in the current context of of now is that they try to push on to the government in order to step up. And one of the things we've had last night with Steven Mnuchin, the Treasury Secretary, speaking, talking about the US needing additional fiscal stimulus. A fourth round of fiscal stimulus should include help for travel, retail, and leisure businesses, and possibly more cash for American families, according to Mnuchin. He said the administration had discussed capital gains taxes, but Mnuchin indicated it's not the best approach. And one of the things about, you know, kind of tax cuts and things like that is that you need a job in the first place, right, before you can benefit from that type of thing when it comes to certain tax rules. And so it doesn't really address and help the problem at its core. So yeah, more fiscal stimulus, certainly, yeah, it's got to go through various different loopholes through Congress to get, to to get authorization and to then be implemented. But certainly this in itself would be a positive. And when you think about the, the connection to monetary policy, the ultimate then move to yield curve control probably looking like it would happen, because as the economy starts to in the future return and starts— activity starts to perform again, then obviously yield expectations will start rising. And if they want to suppress the long end to keep interest rate expectations generally fixed and low, that's going to be beneficial then for the government to be able to continue to better, um, create new debt and borrow and spend in, in to that extent. So yeah, not, not to make too much out of this in the short term intraday, this is not so much a focal point. The focal point is elsewhere, which is more on the COVID situation. So talking of that, let's have a quick look and a couple of images and statistics to run you through So the headline being that a second US virus wave emerges as cases top 2 million. Specific interest on Texas, Arizona, Florida, and California. I'm going to show you some, some graphics in a moment. Experts say the surges cannot be linked directly to reopenings as yet. And a lot of the articles I've read this morning are saying it's a little bit too early to say whether or not this is being tied specifically to things like the protests and riots that we've seen across America. Looking at then, um, the current state of play, this graphic I guess isn't particularly new. The numbers obviously have moved in terms of the areas of which have been most badly hit by the virus, typically being on the West Coast in California, down in Florida, and then particularly in the Northeast so New York State and so on. Now, one of the things people have been looking at is this, which is some of the states that relaxed lockdowns earlier, so came out of the lockdown earlier, are reporting a new rise in infections. And these obviously are some of the key states in America in terms of their size of population. More than two-thirds of the 13 states that reported more than 500 coronavirus cases yesterday are from the south and west regions that began reopening their economies early last month. To give you some numbers here, so Texas on Wednesday yesterday reported just over 2,500 new coronavirus cases. That's the highest one-day total since the pandemic has emerged, as you can see here. Florida this week reported 8,553 new cases. That's the most of any 7-day period. California's hospitalizations are at their highest since May 13th. They've risen in 9 of the past days, and in fact 9 states have seen COVID hospitalizations hit record highs. So, you know, this week has been interesting because, you know, everyone keeps talking about equities and how far can equities go Even though it's completely disconnected from kind of economic reality or fundamentals, equities are still bid, people still feel bullish. The biggest risk, of course, has always been this exact situation. And I'm not saying that we've got there yet, but I'm saying that as a key subject matter that would create the biggest risk to the kind of stability and rally certainly we've been seeing in equities. Has been this. And that's one of those things— markets always tend to overextend or overreact to the information that we see. It's kind of one of those mental ways of which the human brain reacts. We tend to overreact to what we're told. And, and certainly the market has been somewhat quite relaxed about how the virus has been performing. And if anything, it's underlying partly— it's some of the, the move higher in equities has been the fact that perhaps we were over-negative in terms of the risk factor associated to a second wave. The problem is then you swing so far the other way that now it's not really priced for a second wave anymore, and you start to see the first emergence of something similar looking like that, and the market gets a little bit spooked. Now, how far could we pull back here in equities? Well, when the US come in, I'm quite interested to see how they behave. Could be quite an interesting open actually on, on the US session because a bulk of this move and the kind of circulation of this information really has come out in the overnight Asia-Pacific session. So the Americans haven't really got their teeth into it yet, so be quite interested to see how we perform later. I would say, as I've always said, this just means we need to continue with great vigilance to monitor this situation intently going forward. Okay, on the, the end of the virus conversation, um, this absolutely is not a market mover as far as the broader market is concerned, but I think it's always good to keep an eye on what are the specific companies and treatments and therapies that are being discussed in regard to potential ways to counteract then COVID-19. And Eli Lilly and Co. could have a drug specifically designed to treat COVID-19 authorized for use as early as September if all goes well with two, uh, either of two antibody therapies it's testing according to their chief scientist. And so, you know, with a lot of these drugs, uh, you know, in a very top-level sense, I think it's quite easy to get, you know, just oversimplify it and think that, you know, a vaccine means, you know, you come up to me and shoot me with a vaccine and fine, I'm COVID immunity for forever. It's not quite that. A lot of these treatments are more tied to things like being able to slow down, let's say, uh, the way of which a person, um, expresses the type of symptoms with the virus, the ability to recover once they have contracted the virus, you know. So it's kind of, kind of manipulating, if you like, a little bit existing therapies and trying to change them in a way to make the, uh, COVID situation not as bad, not to completely eliminate, you in that sense. That comes way further down the line. So yeah, again, it's one of those things where people kind of jump all over these types of headlines, but I don't think this is particularly important. Um, but it definitely is something again that, that needs tracking, not just Eli, but lots of the other pharmaceutical companies and all different therapies in which they're working on. All right, final thing then, just having a quick look at the Calendar for today, what have we got? Again, particularly quiet in the UK-European session. There's a bit of supply coming out of Italy and the UK in terms of fixed income, but from a data perspective, not a great deal at all. So it's all very much digestion, if you like, of the— it's the morning after the night before kind of syndrome. And so really, I think it's going to be the US that will dictate proceedings. Europe, if anything, We've kind of just held the positioning to some respect of what happened overnight in the Asia-Pacific session, and I think the real cue for market direction today is going to come when the US come in and how do they perceive the, the kind of information I've just run through. With that, in the US session though, from a scheduled basis, you do have the initial jobless claims, and once again they are expected to decrease. So we've kind of been on a staggered fashion since that kind of 6.6-odd million peak that we had back in the initial, um, what, March period. Uh, that's coming down but still obviously particularly high, which is going to keep unemployment in the, in the millions, of course, when it comes to the US. Um, how important is initial jobless claims? Uh, again, I'm, I'm talking specifically from a market's point of view. I don't think it's, I don't think it's that important. Um, people are very accustomed to this pattern now, and even though these numbers are historically particularly high. This is all kind of baked into expectations at this point, and people will be focusing on, on other things, I think. Um, looking elsewhere, you've got the US PPI numbers, but we've already had CPI, of course, yesterday, and it wasn't really too surprising— a touch on the soft side, but nothing to breach the outer extremities of the ranges. And I don't think that slightly weaker inflation in the context of what's going on right now with the demand being reduced due to the economic situation. I don't think that's particularly surprising. And then this afternoon we've got Eurogroup video conference. You've got the Ecofin meeting following up tomorrow. So a couple of, I guess, interesting things potentially to just keep an eye on in terms of an ear on the squawk and an eye on the news feeds. The ability for still the full signing off. It's not yet a complete done deal of the European Recovery Fund, that €750 billion which we had, what, 2 weeks ago agreed. That was quite a groundbreaking compromise at the time, and it came in the same week when the ECB over-delivered, of course, added more firepower to their PEPP, their kind of pandemic emergency purchase program. That saw the euro rally. So Yeah, interested to see where they're at with that, whether or not they're coming against more resistance against the kind of the Frugal Four who are a little bit less inclined for this kind of debt sharing idea. And so if that comes undone, that could be very interesting for the euro from a negative point of view, given how supportive it was for price initially. And then you've got Brexit. And I mentioned that I don't think there's going to be particularly a lot of movement. I did read or saw some headlines this morning about Michel Barnier potentially putting out some flexibility to compromise on some of the red line areas. So yeah, keep an eye out for anything related to Brexit. I wouldn't expect anything specifically big, groundbreaking in that respect because there's still too much time on the clock really for the art of negotiation to really take place. Bit later on when the deadline looms, but certainly you might see a few comments. And then the other thing I'd say that maybe you want to be keeping an eye on is Donald Trump. You know, Trump, he'll know about these virus figures, and you know, politically, one of the things I was looking at— let me just see if I can go back to the FT— there was a lot of people talking about this sort of thing. And you know, I'm not just picking Boris, I'm talking about heads of state and governments overall across the world, and particularly Boris and Trump. You know, Boris is facing a growing backlash over the virus strategy. Essentially what they're saying is there was a previous medical advisor to the government who, who had said that if they would have just gone into lockdown one week earlier, well, then there would have been half the amount of deaths as there have been. And whether or not that's true is not what I'm trying to say. What I'm trying to say is that politically, obviously, this is quite harming to people's perception of the government over this main issue of how they've handled this pandemic. And so for Trump, could he say something? He probably will. So maybe worth just keeping an eye on. You know, again, as we've said right from the beginning of the week, the trade war is really being parked on the shelf for the moment. It's gone but not forgotten. And so at the moment, people are still focusing on this. So Yeah, maybe keeping an eye out for that as well would be a prudent thing to do. All right guys, that is it. So any questions, feel free to leave a comment on the video. Remember to subscribe to the YouTube channel if you're watching us there, and I wish you a good day ahead. See you tomorrow.