Hawkish Powell Surprises The Market

Okay, very good morning to you. It is now the 1st of December, so the run into Christmas truly does begin now. And to get you up to speed, we're going to talk about this guy here, Jay Powell, who obviously spoke yesterday and somewhat shocked the market because of a U-turn he made on some previous prepared text that had come out on CNBC where he was really talking up the downside risks around Omicron, the new variant. And yet he came out yesterday and really started to talk about hot inflation, and therefore the need to drop the view of transitory inflation as a description, and thus then start to accelerate the tapering process. So a very hawkish turn from the— what otherwise is normally a pretty consistent Fed chair. And as I said, that caught markets off guard a little bit yesterday. So we'll have a look at how markets have recovered, uh, so far, because much of that move has now been taken back, and I'll explain perhaps why. We're also doing Omicron update. We'll also look at crude oil inventories. Last night we had some Chinese data, and Erdoğan, the Turkish president, continues to defend his policies as well. So that's what's on the agenda. But looking at the charts this morning, so to refresh your memory, I'll just look at a couple of these charts. So here's EURUSD from for example, reflecting the moment of which those hawkish Powell comments came out. It created immediate dollar strength. And actually, if I was to put up the T-note chart here alongside it, you can see dollar and yields spiking higher on the back of the hawkish comments. And thus then, euro-dollar popped lower and T-notes did the same. As you can see here though, in terms of euro-dollar, we've probably retraced 3/4 of that sell-off. T-notes not quite as much, but you can see we have found a bit of a floor on that initial spike. Uh, they're trading still down 6 ticks overnight but have been grinding up in the overnight session. Uh, oil reflecting really T-notes in regards to that type of price movement. A little bit of a pop in price through a technical point of inflection. You can see here, if I just put on a rectangle, you can see what I'm talking about, uh, here. So you can see that these lows that we had been trading from going back to the 24th to retest on 26th yesterday, and then the breakdown that we saw, the break of that on testing the Asia-Pac session just as Europe has stepped into the market. The gold market as well, in the futures space, pretty thin at this time of day, just snapped up higher. So no one singular headline, more of a just price reaction point of view there. And we reside at pivots, so we're up around $11, obviously reversing a large portion of that move that was seen yesterday. And then looking at the likes of the equity space, here's the NASDAQ 100. You can see pretty much a U-type shape where the Powell comments hit and where we're trading at the moment. So almost a full recovery of sorts. So let's just get up to speed then and recap first of all what exactly happened. And, you know, one of the things that we've seen so far this month is that the CBOE Volatility Index, so the VIX, has notched its biggest monthly surge since February of 2020. And obviously it comes amid two things: the, the twist here we've seen from Powell, and also the latest variant that's come out that's obviously unsettled the market somewhat. Overall then, what did he say? He said at this point the economy is very strong and inflationary pressures are higher, and is therefore appropriate in my view to consider rapid up the taper of asset purchases. And he went on and said perhaps a few months sooner. And of course, this is what people have been, uh, in terms of many US banks like Goldman Sachs, for example, who are talking about acceleration of doubling down on the, the amount from $15 to $30 billion from January and looking to then wrap up taper by an earlier timeline of March. But you remember, wasn't that long ago when they commenced tapering that they were hinting towards the summer. So we've seen a bit of a 3-month or so shift in that. Um, he added, I expect that we'll discuss that at our upcoming meeting. And remember, this is the final week that the Fed are able to communicate to the market before they go into that traditional blackout period when they're not allowed to speak, at risk of then any leaks of their decision and so forth. So that means really they've already got a couple more days to really define find then any more management of market expectations. And given what's happened here, certainly one would expect now that there's probably going to be quite a lot of emphasis now on December 15th when that announcement comes out from the final FOMC meeting of the year about the acceleration of tapering. He also, as I said, stop— said to stop using the word transitory to describe inflation. So finally, that, that kind of namesake gets dropped at this point. Money markets are now showing a 55 basis point of rate tightening, more than 2 standard quarter point increases then are being priced in by the end of next year. The first full rate hike remains priced for July at this point in time. Contradictory to that though, one thing that did come out yesterday was US consumer confidence slid to a 9-month low in November, Obviously had a bit of a pickup in COVID-19 cases and infection rates accelerating, inflation all weighing on Americans' views about the economy. Also, as far as kind of Black Friday, Cyber Monday went, the final sales for Cyber Monday fell short of estimates as well. So it's not all kind of positive. Certainly the Fed's emphasis seems to be here on inflation, but the tail risks here for Fed, for Powell, are large. I think for one, the most obviously being Omicron, the new variant. And at this point in time, I did find yesterday his comments quite, quite a surprise because with the lack of real definable scientific information, it's all very much anecdotal evidence about, you know, the strength of the vaccines to hold up against this new variant, the types of symptoms that we can expect, because there really hasn't been enough people infected to really make a lot of those judgments, and they'll be coming in due course. So with the Fed going into blackout period and then going into the period where we get more information over those coming 2 weeks ahead of the FOMC announcement on Omicron, then it's going to be super interesting to see whether Powell was right to go with what he's, he said yesterday, or whether or not he fails to live up to that hawkish now expectation that's going to build into market prices going forward if the COVID developments were to materially worsen. Obviously yesterday, one of the things that we had was, you know, if you look at this chart of the last quarter, Monday— or Friday, I should say— we had a big sell-off, the bounce on Monday, the sell-off on Tuesday. Who knows where we'll end today. But yeah, definitely it's— that's what's really livened up and seen the VIX post its biggest monthly surge since February of 2020. And you'll remember Feb 2020, that was when all the major selling commenced on the transition really from an epidemic to pandemic status, when we saw that market low at the end of March in 2020. So yeah, for sure, things are pretty, pretty jumpy at the moment. The ship has steadied, as I said, much of the pound move has been reversed. I think actually when you think about yesterday's market reaction, I think a lot of it was a function of what market expectations were, particularly then framed by those release of prepared texts that came out the day before, which were— could have been interpreted as very dovish, talking up the risks emerging from the new variant. And the fact that he did what he did then was so contrast to that, it caused quite a knee-jerk reaction. But in the end, when you actually listen to his speech yesterday in its entirety, he does acknowledge the risks around COVID. And so at this point in time, markets have recovered. Again, we remain vigilant for updates, particularly around the virus at this point in time, to really determine now the impact or the reaction effect of global governments in regards to restrictions. That's going to potentially then, depending on how severe, impede economic activity. and as such then will likely dictate a lot of the rationale whether or not central banks need to take that into account for their policy decisions going forward. And so a lot is really hinging on these updates as we go further in time. Okay, we're going to talk about the virus now, but before I do, don't forget— and I'll drop a couple of links on the video— if you haven't already done it and you are a student, college or university, doesn't matter where you are or what you study, We are running one of our open public Finance Accelerator simulations later on today. So all you need to do is jump on the website, go to AmplifyMe.com and Finance Accelerator session. You'll see a page like this. It's a 2-hour live simulation with the team and it will basically rotate you through different roles as a sales trader, market maker, and asset manager for you to get a real flavor of what it's like in reality to perform one of those roles at a large financial institution. It's absolutely free, so feel free to sign up and take part. There's some cool videos and content to consume straight away, and you can just book in there as well if you want to join. The other thing you get access to then is, is the Content Hub, which looks a little bit like this. And this is where we put up our own kind of exclusive market analysis, conversations I have with leaders in industry, career sessions. And we've also this week initiated our new AmplifyMe Discord channel, which should be accessible via the hub. So you can check that out on AmplifyMe.com. Right, well, let's talk about this virus then and what's going on. And this is one of the articles that came out last night, and it was talking about no evidence existing vaccines will not provide some protection against the Omicron variant according to the University of Oxford. Now AstraZeneca, which co-developed that vaccine with the university, said at the end of last week, for context, that it was testing the shot and already conducting research in countries such as Botswana where the variant has been identified. Now the comment in itself from the University of Oxford saying there's no evidence that it defeats vaccines so far, again, is probably a very factual statement, but that's because it includes, for me, so far, and the testing hasn't really been concluded yet. So there's a lot of these sort of comments coming out, whether it's to the Moderna chief, whether it's politicians, whether it's academic studies and so on and so forth. I would say it's very difficult to draw any firm conclusions as yet. And I know that's a tricky proposition if you're a day trader. But I think overall, from a directional basis, we've just got to wait another week or so until we get a bit more clarity about the severity of The case rate's rising, but layered in on the back of that is really how severe is the overall symptoms that you get on the back of this, and also then the effectiveness of vaccines given the number of mutations that this latest variant has. So those, those questions are still yet to be answered really in my mind. And so I would say over time markets might become less responsive to these types of headlines as people have kind of got over that now, um, over the course of the last couple of sessions. Pfizer, as a timeline, um, will know in the next 2 to 3 weeks on how well the vaccine holds up. That's from their company executives. That gives you an idea of a timeline. And then as far as the US is concerned, at the moment, one of the latest things here has been the US plans stricter COVID testing and will require tests for for all travelers in the US, while the administration officials are also discussing additional measures including a 7-day quarantine and retesting several days after the arrival amid these new concerns. I read last night— the situation might have changed by now— but there's still no reported confirmed Omicron cases in the US. But as what I mentioned on Monday, a lot of the largest sequencing companies that identify then these latest variants, they were closed for Thanksgiving. So I don't think we should necessarily jump the gun here and think that the US is going to get away with not having some infections. I would say it's pretty much guaranteed that they will at this point in time, given the signs that we've seen with the spread so far. Um, then the other country was China. They've detected 91 domestically transmitted COVID-19 cases with confirmed symptoms. Now, 91 sounds incredibly low, but we're talking about a country with a zero policy kind of approach to COVID. And actually, 91 confirmed domestic cases in China is the highest in over a month. And so we continue to monitor that. Obviously, it's very important for the supply chain disruption potential. We're not near that at the moment. Given the scale of things. But certainly monitoring the Chinese situation is quite imperative on that front, particularly with the inflation-centric kind of mindset of markets at the moment. Important to note though that in mainland China, all of those cases that have been detected thus far apparently have not been caused by the Omicron variant. All right, a few other news stories away from that. Crude oil inventories last night I think this is far insignificant at the moment in context of the virus focus, what's been happening in the SPR, the looming delayed OPEC meeting about will they, won't they stick to plan of adding 400K for the month ahead. So yeah, I don't think these are particularly important, but so you're aware, the crude drawdown headline, 747,000, was slightly smaller than market expectations of 1.6. We did have some Chinese data overnight. This was the Caixin Manufacturing PMI. It was slightly converse to what we saw with the, the official figure yesterday, and it came in at 49.9 below the expected 50.5. So this was actually slightly softer than expected. So factory activity fell back into contraction in November. Subdued demand, shrinking employment, elevated prices all said to be the rationale behind what's weighing on manufacturers in China at this moment in time. And then finally, to finish things off, a little bit of Turkey as it's December. And yeah, the President Erdoğan said he expects 10% economic growth this year and they will boost investments, employment, production and growth achieved by lowering interest rates. And again, this is that that very unique approach or view that he has in managing policy. He reiterated interest rates are the cause and inflation is the result of some of the economic difficulties they're facing at the moment and stated there was, quote, no return for Turkey's new economic policies. So yeah, the Turkish lira got pounded yesterday at one point, obviously triggered by the acceleration jump on the hawkish Powell comment. Into these negative fundamentals for the lira at this point in time. But as the market's kind of recovered somewhat this morning, that has come off the boil a little bit. But yeah, we continue to see record lows in the Turkish lira, and they're not abating anytime soon by the looks of it. In terms of the calendar for today, this morning we do have the various manufacturing PMIs, but these are final readings for the eurozone, UK for November. So not likely to yield too much in the way of market interest. And we've then got really a US focus. Obviously, non-farm payrolls is coming out on Friday. You've got US ADP national employment that comes out at 1:15 this afternoon, expected in excess of 500K once again. And then you've got the US ISM manufacturing PMI as well coming out at 3 PM, which should confirm the strength in the economy, but whilst also highlighting with the prices paid component the ongoing price pressures being experienced at the moment. You've got the oil inventories from the DOE as usual, following from the APIs last night. They'll be at 3:30. You've got Bank of England's Governor Bailey, who's been fairly vocal, of course, on, on their rate strategy of late. But he's speaking on a kind of unrelated topic of insurance regulation this afternoon. But nonetheless, that's 2 PM. And then Fed's Powell will testify before the House today, having done the Senate yesterday. So we typically get a recycled speech somewhat from yesterday. So much less of interest unless he feels the need to come out and kind of redefine and guide the market a little bit. If he was to see that the reaction effect of yesterday was a bit overdone or overinterpreted. But given the markets have already steadied, I think there's very little need for that to happen. In all honesty. So that is it. I'm gonna let you guys get on with the day. Feel free to, to drop me a message if there's any questions at all on the video comment section. Otherwise, yeah, please do like and subscribe to the channel. Super appreciative if you could help spread the Amplify word, and I'll see you same time tomorrow. Take care.