FOMC Minutes & Reaction Explained

Okay, very good morning to you. Anthony here on the desk, Thursday the 20th of August. I hope you're doing well. And first of all, thank you very much for everyone who joined us for the live FOMC minutes coverage last night. If you didn't, then go to the YouTube channel. I'm on it here just to show you. If you scroll down We've got different categories of content essentially by different members of the team covering their specialisms. But if you go to the live session recordings, you can access the, the minutes recording there. And there was a session last night run by myself, Sam, and Alex, uh, preview into the whole event, both fundamentals and technicals, and then the live release and why the market did what it did in the immediate aftermath and how we would make sense and look to trade a news-driven event like that. So perhaps a good example for you to go back over in time, perhaps at the weekend if you want to do some kind of reviewing and further, further work on your, on your trading game. But yeah, other than that, really great to catch up again with some familiar names as well as those new. So another one more live session is coming, so don't forget to subscribe to the channel. We've got a brand new video coming from Milan Deep from our tech team on algorithmic versus discretionary trading on Saturday. So I think you'll enjoy that one as well. But just having a look then at what we've got, let's go back to the charts. And for this morning, it's kind of the, the morning after the night before, if that makes sense. It's kind of the, the aftermath of the FOMC minutes. And there's definitely, um, a little bit of content I want to just discuss around this point. And some of the market moves that have occurred this morning I think are quite telling of where I think now markets will go, uh, going forward. But overall, as you can see on the charts, the immediate aftermath of the minutes saw equity index futures move lower. So we had a lower close on Wall Street, and generally then that led to a move lower in the Asia-Pacific session. Everywhere from Japan, China, Australia, Hong Kong, and South Korea were lower overnight. And in terms of European morning, the DAX then following suit, futures down about 143 points this morning. Elsewhere, the dollar has held on to the bounce that it saw after the minutes, so we're up about 0.2%. So that has seen then a full reversal of— just putting it in context though, it's only the last 2 days or so gains that we've seen in these major currency pairs, in EURUSD and in cable. So it does look quite extreme, the downward movement But as I'm going to discuss shortly, largely that's a byproduct of how extreme the dollar selling has been. And it really has been a dollar narrative, not so much euro and sterling, which has been driving this FX market. Elsewhere, gold did dip last night. We went from around $1,975 to overnight in the Asia Pacific session, we actually got down to around $1,930 before we've seen a pretty sharp bounce, actually a $30 bounce. So we've retraced almost two-thirds of that initial sell-off in gold. And if we look down here in the bottom right-hand corner, T-notes, um, they moved lower last night initially of some 6-7 ticks. All of that reversed and some, and we're actually trading higher now than where we were prior to that release, only by around half a tick or a tick or so. The interesting point there being that although equities remain suppressed, if you like, post the minutes last night, the 10-year has already recovered. And I think that in itself is a really telling point because I think when it comes to the FX move and the equity move, I think both of those two assets are more reflective of the overextended positioning that they were in. Equities are all-time highs, ripe for a bit of a pullback for any given reason or catalyst. And the same with the dollar-based pairs, given the persistent selling we've seen in the greenback. In fact, the dollar had sold off for pretty much 5 days in a row, so it didn't take much then for it to see it just bounce back higher. The overall summary here from my perspective, and I'll walk through in a minute, is that I don't think that these moves will last. I think equities will recover. I think T-notes will continue to remain kind of where they are. I think gold will continue to bounce over the foreseeable future. And I think that, yeah, those currency markets like EURUSD and Cable will find a footing and the dollar will recommence that downward trend is my overall expectation. But having a look, a quick look at the minutes, it really is quite interesting actually, because when you're reading Bloomberg— I read Bloomberg, Reuters, and the FT's, as well as a few other things, their kind of interpretation of what happened in the minutes. And it's one of those things really, I think when it comes to these news organizations, typically they're not market practitioners, they're journalists. And it was quite interesting because the spin that Bloomberg puts on this is that the sell-off really was down to how downbeat they were, the fact that the health crisis, the pandemic, would weigh heavily on economic activity. I actually think they're wrong. I don't agree with that statement. And I thought the FT The Financial Times did a way better analysis and coverage of this situation. For me, it was Bloomberg not really understanding the mechanics of how markets work. And as we were discussing in the, the live session we did last night, it was all to do with really about how the market was positioned and what it was expecting as to why the market did what it did in that kind of negative type reaction, not to do with the fact that they were decidedly downbeat. I don't think that was the sole catalyst for why why it happened. A few other points here. So the main thing is a lot of people are looking ahead with high anticipation about what are the Fed going to do with enhanced forward guidance, and that being things like this average inflation targeting or yield curve control particularly. And we were, we were waiting to see the depth of discussion around these particular points. But the idea here was that they indicated last night, and this was what the minutes actually look like, they indicated no immediate plan to take unconventional measures to support market stability. You know, such explicit guidance like a path on federal funds rate in the future or yield curve control was not present. And you know, the reason why I'm showing you the minutes here, this is the actual documented minutes. I mean, we're talking quite a lengthy document was because last night, if you're actually trading this, the information didn't come out immediately, which was incredibly unusual. Normally this is a timed release, it's embargoed, meaning then London time at 7 PM it just hits the tape and all the information comes out. That didn't happen last night, and that did bring about quite an interesting thing for a new trader, which is you've got to be calm in those situations. It was quite, um, it it can be tempting then to just heighten the nerves and you get a bit apprehensive and you can make a fairly irrational decision under those conditions. The important thing is if you haven't got the information to hand, then how can you make a decision? If you just start trying to hit any volatility in market price that you're seeing without knowing underlying of why it's doing what it's doing, I think that's a recipe for disaster essentially. So here then, you know, this was the— this is the main thing that people are looking for really is this ongoing review of monetary policy strategy, tools, and communication practices at the Federal Reserve. It's been going on for some time, but it's the outcome of this which is going to be particularly important for then the future forward guidance and subsequently then our insight as to how they're going to manage the economy going forward. The point being is we've got some really big events coming up at the end of the month. You've got a virtual Jackson Hole Symposium which is one of the major platforms the Federal Reserve Chair uses to communicate his thoughts about current conditions but future monetary policy actions. And then that is teeing us up nicely for a really big FOMC meeting on the 16th of September. That's going to be a big one because that's when we are going to be looking for these details. So for me, the best summary I've read this morning about the FOMC minutes was this. Uh, that the commentary that in the minutes suggests an ongoing weak economic backdrop where inflation remains persistently low, yet there is little inclination to offer additional imminent support to the economy. And that being then the lack of details on some of those other unconventional options that I've just mentioned. That in itself was the disappointment and why we sold off. Because the market from a positioning point of view is hungry for more, and it just fell short of that. It fell a little flat. Does that mean that the Fed aren't going to deliver on this promise of further additional unconventional policy? I think no, I think they will. And that's why I think these moves that we've seen will be decidedly short-lived, and I think we will resume normal service soon enough. Perhaps even as soon as today. That meaning I think equities will bounce today, and I think the dollar will now pare some of that initial strength that was seen from yesterday. I think that was a, if anything, a byproduct of it just not delivering on those dovish notes that some people were expecting. So hopefully that makes sense. A few other things I want to talk about that have happened in the overnight session. This is talking about US and China, obviously following the delayed meeting and a few few pop shots from Trump saying that he, he was the one who was in control of that situation over the last couple of days. The latest here is that US has announced it is suspending its extradition treaty with Hong Kong and ending reciprocal tax treatment for the former British colony. And Hang Seng actually was one of the biggest underperformers overnight, was down around 2%. It's in line for its biggest loss in almost a month on the back of this. Um, so not massively, um, game-changing here. It's just kind of the next evolution of how Hong Kong's been in the spotlight as per the, the bigger, broader situation that's unfolding with mainland China at the moment. The other thing from a news perspective is this. We've been waiting, of course, for when is the stimulus coming out of the US. And they've been at loggerheads for the last 2 weeks now, really an impasse where they've failed to— since the end of July when a lot of those benefits had ceased. Obviously the executive orders from Trump have done a partial job as a kind of placeholder for now, but ultimately the market will be expecting some kind of stimulus to be forthcoming. So timing of this is quite key. And basically the latest here is that Trump's spokeswoman said that the administration was willing to look at $25 billion in additional funding for the U.S. Postal Service. Now, why is that important? Well, that's the amount Democrats put in their original stimulus plan and are including in post office legislation that they expect to pass in the House this weekend on Saturday. Now, Steven Mnuchin and Senate Majority Leader Mitch McConnell have said Pelosi's decision to break out the $25 billion in funding for the Postal Service away then from this overall Democratic stimulus package as a whole that they've been trying to negotiate and push forward could then provide an opening for talks. If they're just going to settle on this one part of the issue— if you can't agree on the whole, if you can break out little parts and start to at least work on those individually, of which this would indicate Perhaps then the dialogue can become and the compromise can start happening, would be my, my interpretation of this. So does this mean that there's a looming stimulus agreement in the offing? Absolutely no. But it perhaps is another step towards inevitability that we on the desks do think that stimulus will be coming at some point. It's just the fact that given the way that markets have behaved, COVID has behaved in the States, economic data recently has behaved, the pressure just really hasn't been on for them to make a more decisive, timely piece of action so far. They can play it out because of those more stabilized factors. Okay, elsewhere, um, COVID, what's been going on? Well, again, it's a little bit split globally, um, and I'm going to focus on mainland Europe and in the US, the kind of two key areas that the market generally is quite sensitive to in the Western world. France, as you can see from the headline here, reported its biggest increase in new coronavirus cases since May. So a few extra measures that they're now adopting regarding face masks and so on in major populous areas. Neighbors including Spain, Germany, Netherlands have all been grappling with this, a kind of moderate resurgence that they've seen of late. However, on the flip side, this is America. And obviously America being the world's largest economy, intrinsically important for the performance and outlook for the global economy, the US situation still is improving. As you can see here, we've got number of positive COVID cases per day continuing to decline, as is the 7-day average. Hospitalizations is continuing to decline. As to now, our deaths are over a 7-day rolling average. So, you know, I think part of the reason why COVID is still, um, obviously to be monitored, to remain vigilant for any updates in terms of it actually having a meaningful impact on markets at this point, I think this really underlines this graphic of the US situation of why the market is fairly comfortable of where we're at with this subject matter for the moment. And that's why I do not see it being an issue right now, not unless these numbers in the US start to change direction. But they're all uniform, pointing in a positive way at the moment, i.e., the situation is getting better, not worse, for the time being, despite what we're seeing in some other locations in Western Europe. Western Europe could be a threat, of course, but it needs to accelerate considerably in terms of the case numbers. So not quite there yet, but perhaps something to be monitored going forward. The other thing we had yesterday was OPEC+, the JMMC meeting. The Joint Ministerial Monitoring Committee met. What did they say? Well, they didn't throw out any surprises really at all. They basically said they want to press for compliance with the existing agreement between OPEC and its allies. Uh, the cuts would deepen this month, um, they said overall and next month, but that's because of compensation cuts. By Iraq, Nigeria, Angola, Kazakhstan, because the fact that they overproduced too much oil in the May to July period. And perhaps this graphic really shows this best. What this has got here is some of those key target OPEC countries. It's then got the target of which they were supposed to have cut by, and obviously some countries much larger, or I should say the target they're supposed to have produced at a maximum amount to. Obviously, countries like Saudi, their maximum amount of production is way higher than the others, very much dominated by the likes of Iraq and so on. But you can see here, if we tally maize production figures June, July, and then we go all the way to the right-hand side here, you can see in the case of Saudi Arabia, as they have always done pretty much in the last few years, they've over— they've been overly compliant. You know, picking up the tab, if you like, for some of these uncompliant nations. But now they're starting to put the pressure on. And why? Well, it's not just Saudi now. Russia are involved, other countries are involved, and in order for them to be appeased by the deal, then everyone's got to play ball. And the biggest culprits here are the ones that you can see with the biggest plus numbers. So Iraq was 283,000 barrels per day of oil uncompliant. Nigeria is 111,000 barrels per day uncompliant. So these are your biggest culprits, and I don't think that those two countries really come as a big surprise. So overall, nothing really to speak of. I wouldn't say directionally I've changed my, my view at all on oil. I think oil, at the period of the last 3 days, has been in a relative period of consolidation really between $42.50, $43.25 in, in the front month futures contract. So yeah, that was the latest on that side of things. Calendar-wise for today, what have we got this morning? Particularly quiet, nothing really substantial of nature, but we do have the ECB minutes coming out, although albeit not expecting a great deal. That'll be at 12:30 London time. US jobless claims, yeah, it'll be, it'd be interesting. They are expected to show a minor decline again, which would consolidate then a 3-week trend of what we've had of jobless numbers decreasing. So hence again the reason why I was saying that generally we have had some more positive data points coming out of the US, and we'll see if jobless can continue that trend. We also get, um, Philly Fed Business Index as well at the same time. Speaker-wise, you've got the Bank of Canada Deputy Governor speaking in a panel discussion 5 PM, Fed's daily and non-voting member speaking at 6 PM London time, so midday Chicago. So Supply-wise, quite a lot coming out of the French Tresor this morning, and then you've got a US 2, 5, 7-year note and 2-year floating rate note announcement coming at 4 PM, and then $7 billion in the 30-year TIPS for any fixed income traders. That's happening at 6 o'clock tonight. Yeah, and that is it really. So any questions at all, please feel free to leave a comment. Hopefully that brief overview of what happened and the interpretation of the Fed makes sense. If it doesn't, just leave a comment. Myself or Alex, we can all help. But do go back and check out the live coverage because Alex did a fantastic job in his preview of what to look out for and how to strategize and kind of have a concrete playbook of scenarios ahead of a big news-driven event that really did play out nicely yesterday. So Yeah, check that out when you get a moment. Okay guys, that is it. I wish you a good day and I'll see you same time tomorrow.