Fed Paves Way for Low-Rate Era

All right, very good morning to you. It is Friday the 28th of August. Hope you are well. First things first, don't forget to subscribe to the YouTube channel. I had a really great interview with a super experienced options trader yesterday, and I'm going to publish that video on Saturday morning. So if you want to get hold of that, subscribe to the channel, and just click on that bell icon. You'll get notified as soon as that goes live. Also as well, if you've not looked before and you're new to the channel, check out amplifiedtrading.com/traders. That will take you to our proprietary trading arm and our trader development programs that we offer. It's our last day for our intensive 1-week advanced program today, so all the best for those guys, and we're working with them throughout the day. But if you want to join the next cohort, this is the place where to go. But let's get straight into the charts and have a look at what exactly is going on this morning, and, and very much so a digestion of the information yesterday, obviously from Jerome Powell. So at the moment, the dollar is weaker. We're toward the lower bound of the volatility that was seen initially after the confirmation of average inflation targeting was announced in that conclusion to their monetary policy review. So the DXY this morning has declined overnight. We're back down 0.4% and as a consequence, hence the reason why you can see both EURUSD and cable then the kind of mirror image of that dollar index up testing around the initial pop on the highs that we had. So EURUSD up 45, cable up 60 at the moment. Elsewhere, gold as well has just been edging higher during the Asia-Pacific session with trading above the pivot level in the futures, up $18 at $1950. Equity index futures positive. You know, we were talking about this at length going into the actual announcement yesterday about how equities could have been susceptible or vulnerable to a potential sharp pullback if indeed Powell did not deliver. Of course he did, and so that eradicated any of that nervousness or, I guess, built-in expectation and the consequent action that might have happened if he didn't. But obviously he came through The information came out and that just gives further underlying support. Now this, this idea, basically what's happening here in terms of the dollar, in terms of equities, is that overall US interest rates are not going to go anywhere for a long period of time. A new era of long low rate environment essentially. And so that's a supportive one for equities. And if you're having a look here at the S&P Um, we've got some nice, I guess, platforms now for price activity for the, the session ahead. You've got 3497, you can see, was that initial peak that we had in price push yesterday afternoon. We had a retest of that as well just before the close on Wall Street where we just dipped, but then we broke through it in the Asia-Pacific session and it acted as a nice area of support early in European entrance as well. And then if we go back further down, probably towards then looking at the S1 here— well, let me just quickly move this line for a second— you do have the pivot level, which does coincide with around that high that we had on the push-up on the 26th. And then that S1 encapsulates some of that price activity on those highs and lows that we've seen during the, the kind of bottom of yesterday's price action. Further down then, even if we were looking in the most extreme bearish situations as well, further levels where ultimately ultimately, you know, even if you did get a degree of profit taking, perhaps a bit of book squaring going into the weekend— it is a bank holiday in the UK, but it's very much specific to our country, the rest of the world operating as per normal— but if there were any profit taking, just given the push-up that we've had this week, then ultimately you'd probably find some support at these scaling levels to the downside. Again, it's not a market to sell equities, it's a market that if equities come down, it just provides potentially another opportunity to reassert a long position. At that point. Otherwise, elsewhere, WTI crude pretty flat. It has come off a little bit at the recent highs. Actually, Laura is now a tropical depression. So at the point of actually hitting landfall, as it's moved in inland, it has weakened quite considerably. And also, long story short, it's averted some of the main infrastructure, meaning that the worst-case scenario has been averted. Otherwise, elsewhere, the US 10-year is down quite, quite sharply when taking into context the move from yesterday. So although what they've done is a move towards being more dovish policy, what we've seen is quite aggressive yield curve steepening. And then so yields rising in the lock-in has really dented the 10-year and even 30— the 30-year in particular. But I'll talk about that more in a moment. So Let's get into some of the headlines. What exactly has the Fed done? Well, as we now know, the Fed will look at shortfalls on employment rather than deviations, and a new approach will tolerate prices overshooting a 2% goal, which gives them open flexibility then for this, rather than having a definitive level of 2% where that would have a reaction effect of tightening policy If we've had a prolonged period of undershooting, there can be a period of overshooting to average it out before then action would take, which means then essentially rates are going to be left where they are for a long, long period of time, multiple years, well beyond what the current dot plots would be suggestive, which is keeping rates low through 2022. You're probably looking now more like 2024, '25. Is what this would indicate. Now, one of the things, as I just said, that perhaps is throwing a few people off who maybe don't look at the fixed income market is that T-notes are down quite sharply. Because in a normal, I guess, asset class reaction, you would think, well, more dovish would mean lower yields and consequently bond prices would rise. But it's quite the opposite because it depends on what duration and part of the curve in, in rates that you're looking at. And obviously we trade predominantly the 10-year, uh, which is further out. So what you're getting is suppressed yields in the short end because in the near term now we're anticipating rates to stay low for long, but going further forward out in time, then there potentially could be a sharp pickup of inflation in the future. And so as such, then longer-dated yields are moving higher, and that's putting pressure on some of those bond prices further out. Um, so this is having a look at that. The yield curve steepens as 30-year Treasury sell-off. So a few things to be aware of here. The announcement, of course, as described, comes as they will allow inflation to run above its long-standing target in order to make up for periods of undershooting. So investors have attributed the backup in longer-dated yields to the possibility then of higher inflation. And what does that mean? Well, that means then that it would erode real return that bondholders earn on their fixed interest payments for government debt. In order to achieve higher inflation than, than it has managed in recent years, the Fed is likely to hold short-term rates very low for a long time, as I described. So the steepening of the yield curve also reflects, though, disappointment among investors about the lack of detail from Powell about the Fed's bond buying program. So away from this, this other area of inflation and how they're using that now as a a way of dictating policy. On the bond buying front, so the separate unconventional tool, the bank committed to buying Treasuries of all maturities at a pace of $80 billion per month. But some investors have been calling for the Fed to purchase relatively more longer-term debt to reflect the increased supply and hold down their yields further out in, in terms of duration. So again, this kind of idea about yield curve control suppressing the yield rise that we might see in the long end and, and that's definitely not been mentioned so far and probably going to be kept for reserves should it so be necessary later on down the line. So a steeper yield curve does though come with benefits for one particular sector in the stock market, which we saw was quite evident yesterday, and that is then improved interest margins for banks, or at least expectations of, prompting strong gains for some of those financial stocks. Then this is a look at the S&P on a sector breakdown. You can see down in the bottom here you've got financials, so you've got banks, diversified banks, credit services, banks, uh, in terms of regional. But some of those big ones, JP Morgan, were up about 3.25%, Wells Fargo up 2.25%. So yeah, some decent gains seen in that space. The other big green spots here obviously were Microsoft and Walmart. And you probably saw the news, but Walmart joining Microsoft in its bid for TikTok's US operations was one of the big equity headlines yesterday, and their shares moving higher on the back of that. On the flip side, Facebook just giving back some of those really excessive, some would say, gains that we've had over the prior two sessions of gaining kind of double digits in a period of 48 hours. So a little bit of a pullback probably warranted. Similarly for Adobe, which got a real boost on the back of that Salesforce earnings report two days ago. So Just explaining some of the main major stock moves there. Moving on though, away from the Fed, one of the other things to talk about is this, this morning, because the Japanese yen has been strengthening. So if you're looking at the dollar-yen pair, dollar-yen has dropped from around a 107 mark down to— towards really the 106 handle. So pretty decent move seen overnight, and it comes on the back of this report that Abe is set to resign. And that's due to worsening health. He's 65 years old, so I'd say he's, he's not that old. I mean, he's certainly younger than Joe Biden in that respect, but he's visited hospital twice in the past 2 weeks. Officials have been pushing back strongly on the idea that he's going to resign, but it looks like from some of the latest things that I've read that it definitely looks like that is going to happen. Um, he's going to hold a press conference shortly to confirm and outline some further details as well. But why is the yen strengthening? Well, the yen is strengthening and stock markets have been pressured because this chap right here that you're looking at, the resignation of him could represent the end of an era of his reflationist and three arrows Abenomic policies which he's put in place really over the last 8 years or so. In addition, JP Morgan Uh, just to refresh a note that they recently put out, they said that any resignation of him could result in Dolly Yen actually declining to the 100 level. I mean, that's a long way off from where we are at the moment, and certainly there's been about a point move seen in the overnight session. Um, but yeah, I'd say generally speaking then, this idea of supporting the economy through monetary, uh, you know, kind of the Japan has done everything that they possibly can, albeit inflation still remains somewhat in the doldrums, which is a bit of a warning sign, I think, for the Fed in some respect. But the three arrows being removed under his, his stewardship would be seen then as a potential move away from such a accommodative stance that he's adopted with those— that three-arrow strategy. So, but again, strength. Other things that have happened overnight, you had the closing of the Republican convention, and this is when Donald Trump officially kind of accepts the nomination. He actually spoke for about 70 minutes, which is actually the second, second longest nomination acceptance address since at least the early '80s, I believe. What was he talking about? Well, this is his kind of moment to shine. The optics were very clear to see. I think Joe Biden, when he did his, was pretty much in an empty room on his own. Whereas Donald Trump, of course, the complete opposite. He was outside the White House on the front lawn draped in US flags. There was about 1,000 people who probably not doing the best case that they could do in adopting social distancing rules, chanting USA and so on. But what was said? Well, he said that Biden would only exacerbate racial strife and coronavirus pandemic besieging the nation. He claimed that Biden would defund the police. And again, it goes back to that, that kind of classic US political narrative of law and order, you know, using, you know, really pulling on the strings of innate human fears, like using words like chaos and, and this talking about rioters and these types of things. I mean, it does come on the back of quite a contentious issue that's risen again on the racial front, this coming after in Kenosha, Wisconsin, where on Sunday a white police officer shot another Black man, and that has caused renewed rioting and so on. But Trump trying to flip that almost and leverage in his favor in the idea then that law and order is of the utmost necessity at this point in time. So really, things like that. The other things he talked about was promising a cut to taxes, which obviously is the opposite of what Biden is proposing, which is moved back up. And then creating 10 million new jobs in 10 months, expanding chartered schools and school choice for more families, and turning the country into a, quote, manufacturing superpower of the world to end our reliance on China. So he's pretty much hitting all the notes that you would expect, I guess. Law and order, um, that Biden would be inappropriate to deal with the coronavirus, that he's going to create jobs, he's going to take care of the kids by giving more school flexibility, and he's going to make America great by maintaining their stance as a manufacturing superpower and not being so reliant on China. So It'll be interesting to see how the polls play out. I don't really envisage too much of, uh, now we've had the Democratic and Republican conventions, and typically you see a shift either way whilst those weeks are happening. Uh, I don't think there's been too much of a change. I think the polls are still about a 7 percentage point lead Biden's favor, but again, still a long way to run until we get into those elections. But that's the latest state of play, so nothing really too much to consider if you're looking at an intraday strategy on the back of this. The other thing then was oil. As I said, it's backed off its highs a little bit. What is going on here? Well, oil gives up some hurricane-related gains after refiners are spared. And here's a map. You can see now, uh, Tropical Storm— well, I believe actually now it's a depression. It's even dropped down one further than that since this graphic was made. You can see it's moving through the state of Louisiana and into then moving north and east through the country. The overall idea here though is that oil is actually heading for its fourth weekly gain given what's happened. However, it has then appeared to not inflict as major damage on the region's energy infrastructure as had potentially been feared. The shut-ins as well, we know that more than 8% of oil output in the Gulf of Mexico and almost 3 million barrels per day of refining capacity has been shut in due to the storms. Because remember, Laura was the main focus, but there also was Marco as well earlier in the week. But the idea here is that the shut-in production is likely to return in the coming days and relatively quickly, and perhaps more so, more faster than people might have thought because of the fact that it was spared the main bulk of, of the actual worst-case scenario this weather system could have caused. So should help accelerate the resumption of normal activity, which would be a negative short term to just cap that, that recent rally we've had in crude. Okay, other things in terms of the calendar for today, what have we got? It is relatively quiet for this morning, not too much going on. The 10 o'clock Eurozone numbers, the economic industrial service sentiment figures, rarely market moving. So I wouldn't be too fazed by that if you're trading European assets. Then into the afternoon, you've got the US data, PCE price index, personal income. You've got the advanced goods trade balance figure, CAD GDP for the second quarter. And then the US, probably more interesting, is the Chicago PMI number that is expected to remain relatively unaltered from its prior reading, so expectations of 52 for the month of August. Then you've got the final University of Michigan number coming out later on this afternoon, and the Baker Hughes rig count for any energy traders at the regular time, 6 PM London, midday Chicago. Jackson Hole's not over, the symposium continues virtually, and today actually one of the interesting ones to look out for is going to be Bank of England Governor Andrew Bailey. So he's going to be speaking at a similar time to what Powell did yesterday, so just shortly after 2 PM London time. And yeah, perhaps a bit of interest in that actually, just given the fact that in the rates markets we are still somewhat priced for the prospect of negative rates in the UK, irrespective of the fact that Bank of England officials have pretty much done their best to put that off for the time being. It's kind of an idea on the table, but not one that they're anywhere close to adopting. So given market pricing, I'd be interested to see whether he comes out and says anything, and particularly given now that what we've seen with this new change of tact from the Fed as well. So if you're trading sterling, I probably would recommend being out of any position at that point of which he does speak. There is a tangible risk associated with his speech, and I would suggest it's one to watch. Yeah, and that is it. So hope you had a good week. As I said before, don't forget to subscribe to the channel. There's that new video on some basics around options trading, some examples of where it's been particularly effective so far in quite a volatile year that's been 2020. And I think you'll like it. And please do engage with the video. Myself and Imran, as the chap I spoke to, would be more than happy to answer your questions. Okay guys, that's it. Wish you all a fantastic weekend. I'll see you on— not Monday, it's a bank holiday, but I will issue a video on Sunday for my week ahead for the Macro Menu. Okay guys, take care.