Markets Await Fed 'Taper' Announcement, While China Sees Downward Pressure On The Economy

Okay, very good morning. It is Wednesday the 3rd of November and the day has arrived. After months of communication about this taper word, we're going to get the formal announcement, highly anticipated, from the Fed this evening. To mark that, we will be covering, myself, the event live right here on the AmplifyMe YouTube channel. So if you're not already subscribed, you hit that subscribe button, click the bell to be notified when we go live 15 minutes before the statement. And remember, that's at 6 PM London time because of the clock change here in London and not in the US until this weekend. So don't be caught off guard with that for sure. So we're going to talk a little bit about the Fed. I'm not going to go into great detail on this briefing because I'll cover that extensively later on today. We're going to talk a little bit about the— how stocks finished in the US, how they performed overnight. Some new concerns about China, about downward pressures on their economy and the new COVID outbreaks they're seeing across several provinces at the moment. Actually, now the worst cases that we've seen since really the outbreak in Wuhan back in 2020. And then we'll also talk about the Dutch government reinstating some COVID rules here in mainland Europe. There's an update on Brexit legality around the Northern Ireland Protocol. And then we'll look at some of the other calendar events to be aware of for today's session as well. So as we always do, a quick look at the general lay of the land. And actually, as you can see here, equity markets once again striking fresh record highs. Looking at the NASDAQ future here, the S&P and the NASDAQ both notched record closing highs for a fourth straight session yesterday. The S&P was up and the Dow both 0.4%. Pretty uniform finishes actually. The NASDAQ um, S&P, Dow all up between 0.3 and 0.4%. But having a look here on the daily continuation chart, the one you're very familiar with now, we've been in this kind of trend channel going back to Q4 of last year, and we continue to respect that general range as we grind away to the upside. And for the futures market at least, with the high print of 15978, next psychological stop, given no technical relevance going backward looking, given this is uncharted territory now. Um, 16,000 looms here for the NASDAQ. As far as the S&P is concerned, it's a pretty similar story, um, up and around those record high levels. The NASDAQ, of course, the big mega-cap stocks like Tesla, for example, despite them Elon Musk questioning the validity of the actual contract signing of that Tesla $4.2 billion deal did little to really dampen the optimism in the carmaker. They were down yesterday, underperformed the market by about 3% or so. But don't forget, they were up 8.5% or so the day before and they're up over 30% over the course of the last 3 trading sessions. So, yeah, really not a a lot to pull back on the, the Tesla skyrocket at the moment. Otherwise, elsewhere, currency markets, not too much going on, but you would expect that going into the Fed announcement. And that's really echoed across the other charts more broadly. Gold's down a touch but pretty sideways for a majority of the recent few hours of trade, down $6. T-notes just perking up a little bit, up towards the higher end of the range that we saw from Yesterday's session, so up about 4.5 ticks. WTI crude sounds like a fairly meaningful decline from the overnight session, down about $1.50. You could tie that to a little bit of the Chinese story and narrative that I'm going to talk about in a moment, which does question the economic story at the moment in China, just given some of the, the general concerns that they're seeing, whether it's in the property market, and, you know, a lot of the, the government crackdown that happening across different sectors, the COVID outbreak, um, and so on and so forth. So I don't tie too much to that because as you can see here, you know, if you just come out of the microscope for a second and look at this chart over the course of the last month or so, we're generally trading a range between really 81 and 85 on the upside, and we're kind of mid of that range at the moment. So Yeah, even though we're down $1.50, trading $82.50 at the moment, I don't really see too much behind that. Um, don't forgetting we've got the OPEC meeting as well coming on Thursday, but that's unlikely to yield much in the way of surprises as they continue to just drip feed in that supply, the 400,000 per day kind of agreement that they've already predetermined. Um, all right, so, um, quick look then at the equity market and a little bit about the Fed, I guess. This is a Bloomberg article they put together ahead of every big central bank decision. It's called their Decision Day Guide, and it talks through some, you know, general consensus estimates, some fairly interesting graphics as well to have a look at. So I do recommend that you have a read of that. You can access all of these articles. I tweet out from the Amplify me account, probably something like, uh, 10 to 12 articles per day. So if you just search for Amplify Me, the handle is @AmplifyMe, you'll be able to find those articles. But the point being here is a couple. So yesterday, um, we saw record highs again in US indices. On an individual stock breakdown, Pfizer actually was quite a big standout. They were up about 4%. You probably would have read they have been trending on On Twitter, there's obviously a lot of people quite critical about the amount of money that the company is making through their vaccines. I just heard in the car dropping my daughter off at school this morning that the US are now approving the, a third of the original Pfizer dose to give to 5-year-olds essentially in the US. And so the drugmaker in itself and its partner BioNTech sales of COVID-19 vaccines are going to reach $36 billion. For 2021. So they were outperforming yesterday. But looking at the broader market, and this kind of ties in a little bit of the Fed discussion overall, and even though the markets now await the Fed decision, tapering— important thing to understand is tapering, as meaningful as a milestone as that is, it's really not that unexpected. It's not unexpected at all, in fact. And so it's not really the tapering part par se that the market's really going to look at. I wrote some notes this morning talking about irrespective of the wills of normalizing policy getting into motion, the direction of travel on interest rates is going to be relatively gradual. And so that in itself then is important to understand that the economic recovery, because of things like perhaps COVID, in late summer in the US, but also as well this inflation stickiness at these elevated levels, the economic recovery or growth story has been delayed, not derailed. And hence the reason why then that, okay, they can commence then tapering, but I wouldn't be expecting this kind of immediate rate hiking, um, aggressive cycle. That's going to be then something that would jeopardize the equity market. To make this have a bit more sense, a good figure that I saw to make this point: over the course of taper, the Fed will make available $540 billion of additional liquidity via QE between November 2021— so this month and this meeting— to June 2022. That's assuming the Fed stick to their predetermined kind of forward guidance that they'll look to conclude the QE taper process by the middle of next year. So although, you know, there's all this kind of taper tantrum kind of things that people will mention, in the end, the government here is still going to be making over half a trillion dollars worth of liquidity in the system as we go further forward in time over the next 9 months. So it's not by any way an immediate removal of stimulus and the whole market collapse. And I think this goes a long way to explain why equity markets have traded like they have done at these record high levels, because underpinning this is— if what I'm saying is a more kind of measured approach to normalizing policy in the US, it comes with corporate earnings generally on the balance performing better irrespective of supply constraints and bottlenecks and all these other issues that corporates have faced. And so hence we trade up where we trade at the moment. So yeah, just a bit of a kind of a macro overview rather than going into the nitty-gritty of how to trade tonight, which I'll cover of course when we have the live session later. A few other things that get you up to speed. Over in China, stocks were a little bit lower generally. Hong Kong, China, slight underperformance. We had some comments yesterday you probably saw, but To recap, if you didn't, the Premier of China, Li Keqiang, said China's economy faces new downward pressures and that they would have to cut taxes and fees to address the problems faced by small and medium-sized companies. The other thing, of course, that this comes in the context of is after data showed a weaker economy in October through various different macroeconomic metrics that we've had with China. And then the other troubling thing we're seeing at the moment is more provinces in China are fighting COVID-19 than at any time since the pathogen first emerged in Wuhan back in late 2019 going into 2020. In fact, if you actually look at this, local infections are found or have been found at the moment in 19 of the 31 provinces in what is the world's second largest economy. And so, thing to look at here, the key— it's very important not to look at this so much in context of a direct mapping over how this type of COVID case data gets, uh, gets interpreted in Western Europe, because if you actually look at this, we're talking about 1, 1 to 100 cases So these orange hotspots, which look like a dramatic outbreak of COVID we're talking about 144, 177, and these are provinces, which, you know, the drill, a province in China is about the size of a country. And so these numbers are very low, but the point being here, uh, that's interesting is that China have, as from their authorities' approach to containment, of COVID is incredibly aggressive. They call it the golden 24 hours, where even the sniff of a COVID case, the entire area goes into lockdown, immediate and mass testing takes place. Now, they were quite good at this back earlier on in the initial pandemic begun, but one of that— what that means then is that people's immunity levels generally have not happened. It's not like in the UK where we've had some of the highest COVID rates in the world, but that then in turn means that general natural immunity is quite high, whereas in China, if you immediately just put everyone to lockdown, hardly anyone's got immunity. Then comes the pressure you put on the vaccination rollout program. But the difference is, instead of talking about a country of 60, 70 million here, you're talking about a country in excess of a billion when it comes to there. And so herein lies a bit of a challenge now because also as well, things like the efficacy decline that you see in people who are early vaccinated means that they now need booster shots and so on and so forth. So China's kind of getting these— this renewed uptick at the moment. And that again is quite concerning, just generally given some of the weak economic data and the government in itself, Beijing, paying note to that, talking about the new downward pressures in which they face. And so Again, another reason that actually, for following this full circle, given how global and interconnected the markets are, the Fed will be mindful of this. And although they're obviously looking at the domestic situation, they need to look at the global situation. As I mentioned there, China is the world's second largest economy. And so if they start to suffer, that will start to bleed out into just general economic activity globally as well. And then that lends its hand more to the measured approach of the Fed and therefore continues to underpin generally a nice environment as far as equities are concerned. And again, hence the reason why we trade the way that we do. So hopefully that kind of makes sense. The other things are mainland Europe. As much as I could delve into every individual country, one is the Netherlands, who've been quite reactive. They've kind of made good and very bad decisions in terms of their handling of COVID-19 through the pandemic. But the Dutch PM Rutte has said the country will impose new COVID-19 restrictions with the use of face masks to be mandatory in public spaces, and they've asked people to work from home at least half of the time. So it's kind of like a Plan B soft version of what the UK have been talking about. And so, yeah, the Netherlands having to change course once again. On the Brexit side of things, it does feel like a bit of a broken record. They're still talking about the Northern Ireland Protocol. It's been the last 5 years of my life, but the UK government is seeking to appoint new external legal advisers in preparation for a possible overhaul of the Northern Ireland controversial post-Brexit trading arrangements. This was an article that came out last night. On the FT. If you want to read the full article, I did tweet it last night. The move to find fresh legal advice will fuel likely expectations that ministers are preparing to use Article 16 safeguard mechanism to try to fundamentally rewrite the deal, which has obviously soured EU-UK relations since it came into force in January. So no immediate move on this. Of course, the dollar will kind of dominate proceedings today as far as trading the cable currency pair is concerned. Two ways to kind of look at this from what I was reading last night. One is the fact that they're getting legal advice. So for me, I fundamentally believe this is just optics. The UK makes some noises, talks about Article 16 preparation to kind of just scrap and redo the deal, which kind of blows up the existing Brexit agreement. I don't think they'll do that, but they need to posture as in they're serious. You know, in the backdrop of this is all the fishing dispute going on between Britain and France as well at the moment. As much as that's been kind of kicked down the road for the time being, um, the other thing is it's probably sensible, um, it's probably sensible on behalf of the UK to at least get additional legal advice, to look at potential alternatives as, as solutions to this matter. So that's one way of looking at it. The other way of looking at it is fairly disconcerting that they're having to seek external legal advisors. Um, you, if you think about yourself in any legal situation, if you're going to then seek more legal advice, it's because the ones that you have is not satisfactory, and therefore you've probably wasted a lot of time and effort. And so therefore you might be in a bad initial position legally, hence the reason you're seeking new advice. So there's a couple of ways to interpret that. As I said at the top, um, I, I, I think this is more optics than than anything else. And it's just to kind of show Europe that we're serious about the potential worst-case scenarios and how we could deal with— and when I say we, I don't know why I'm referring to myself as part of the Brexit negotiation team, but Britain, I should say, just posturing to leverage their terms at the negotiating table. All right. So let's look at the calendar for today. Later on this morning, you've got the final October UK service PMI numbers coming out at 9:30. Of course, nonfarm payrolls, don't forget, you know, although we obsessed with the Fed and obviously this time tomorrow's Bank of England and OPEC, we've got the NFP number coming out on Friday. So we get the Fed, various job indicators coming out of the US, ADP national employment, that'll be at 12:15, remember, in London time, not 1:15 given the clock change, expected for October 400K. The previous reading was 568,000. You then get the market service final reading. So focus then will be on the ISM Services PMI at 2 PM alongside US factory orders. Um, you got the oil inventory numbers coming out usual, um, Wednesday afternoon, but slightly earlier again with the clock change at 2:30 London time. The APIs last night showed another build, uh, the 5th weekly crude build in the last 6 weeks. In fact, came in at 3.6 million. Expectations were for 2.25 million. Cushing, a draw of 882,000. Gasoline, a draw of half a million. Distillates, a build, just over half a million. Other than that, just looking at speakers, you got Christine Lagarde, the ECB president, is speaking, but off topic. It's just a commentary at the Bank of Portugal anniversary event happening, but she will be making an appearance from 10:15. You've then got her colleagues Villaroy of the ECB and Elderson speaking at 1:00 and 2:30 PM respectively. Jerome Powell, of course, with the press conference half an hour after the statement. So statement 6 PM, press conference with Powell at 6:30. Fixed income auctions coming out of the UK, Germany, and quarterly refunding announcement out of the US as well. As far as major US earnings, nothing really from an index point of view that you need to worry about, but from a single stock perspective, Qualcomm, CVS Health, as some of the bigger names reporting. All right, that is it. Gonna leave it there, and I will see you guys hopefully later on. I will be live on this YouTube channel, Valentin Me, um, from 5:45, so 15 minutes before the FOMC statement at 6 PM. So hopefully I'll see you then. All right, take care.