What To Expect From Fed Powell's Semi-Annual Testimony & How Markets May React

Okay, very good morning. It's Tuesday, 23rd of February, just coming out to 7 AM here in London and having a quick look around the markets. I want to get you up to speed in terms of some of the overnight moves and news that we've had, and then also look ahead to the main event of the session, which undoubtedly is Powell's semi-annual testimony. But let's just start with the charts and what's been going on. And first of all, we had a lower close on Wall Street, a particular underperformance in the NASDAQ, which was down about 2.6% comparative to the loss of around 0.75% in the S&P. So big tech coming under a bit of pressure again on this idea about what potential then leaning towards higher yields might do, um, to have the biggest consequence of some of those big outperformers that we saw during the pandemic if we start to head into a higher rate environment. And so the S&P 500 index fell for its 5th day. That was the longest losing streak in a year. And with the NASDAQ falling, as I said, just over 2.5%, that was a 3-week low it marked by the closing bell. In regard to the, the overnight session, uh, things have recovered a little bit, as you can see here in the center chart. So the NASDAQ's trading up about 78 points the S&P about 17 points respectively. So as what is typical of a fairly aggressive down day, it tends to be followed by a little bit of kind of moderate dip buying at the low. Also in the Asia-Pacific session, Chinese equities stabilized somewhat from one of the biggest sell-offs that we've seen since last summer, again on the similar fear to what we've been seeing in the Western developed world, which is that of tightening of policy in more broad terms. But the Hang Seng outperformed in Hong Kong. This came after HSBC, uh, had an update. So let me just quickly flash that on the screen and give you a brief summary. So HSBC has abandoned its long-term profitability target and unveiled a revised strategy focused mainly on wealth management in Asia after the COVID-19 shock saw its annual profits drop sharply. The company also said it would resume its dividend. Their shares did jump as much as nearly 7% in overnight trade, so worth keeping an eye on them as well when we get underway on the FTSE shortly in the cash market. Otherwise, in the other charts to, to be aware of, just a quick look at WTI crude. You can see here we have broken out in the Asia-Pacific session above $62.29 in front-month futures, which was last Thursday's high. That then does put us up— if I go here onto the daily chart— to the highest levels. Now, um, we have really traded since going back to this volatility and price action that was seen right at the beginning of the year on the 8th of January. And you'll remember this was when we were seeing a lot of that geopolitical tension in regards to Iran, uh, in the Persian Gulf at that time. Um, so definitely worth keeping an eye there. Upside level 6340 would be up and around that high that we had on the initial Saudi infrastructure shock that we had from the drone strike, which dates back to September of 2019. That was also an area of support and resistance going through 2018-19 as well, and then followed by $65, of course, as the kind of psychological target and rough top to price that we saw in 2020 pre-pandemic. So oil still remain— remaining fairly bullish in mindset. A couple things to be aware of there. And again, just to update you, here are some of the headlines. Um, so global oil market has been undersupplied by 2.8 million barrels a day so far. This was according to Morgan Stanley in a research note issued yesterday. They've boosted their Brent forecast for the third quarter to $70. This comes after we saw the same time period the estimate raised by Goldman Sachs to $75 yesterday. So a lot of these big banks continue to be fairly bullish for price even at these elevated levels that we've seen with the recent resurgence in oil prices. Also as well, the idea that the market to firm on the US freeze and the easing of lockdowns, the latter of course being a global focus at the moment just given the, the general success and speed and acceleration of vaccination programs. We saw, for one, the UK outlining its 4-step process to the roadmap of unlocking, if you like, back to a degree of normality going up until summer on June 21st. And, you know, UK not the only one, similar being seen elsewhere. And it's obviously a crucial component of the demand equilibrium for oil prices in addition to the latest freeze shock we've had in the States. On that point, on the weather side, much of US oil production has rebounded now from severe winter weather that struck much of the country starting the week of Feb 14th, including large domestic oil plays in Texas and Oklahoma. Although an estimated, as per the headline, 15% of all crude output still remains offline, that means around 3.4 million barrels per day have been restored of an estimated 4 million that were shut in at the early, or the peak early last week. So Um, yeah, relatively quick recovery being seen there on the moderation of temperatures that we saw towards the back end of last week going into the weekend. Otherwise, because quickly back on the charts, the other thing here is the major currency pairs in the top left continue to remain relatively elevated. I would say the greenback still the general key factor that's helping support these currency pairs. Cable, as has been the case for recent weeks, also being cushioned somewhat by the successful rollout of the vaccines, which then lays its hand to at least this roadmap which was unveiled yesterday. As I was saying in the briefing on Monday, I think that just adds a further constructive view about giving an idea of when the economy is going to reopen. That as well with, you know, further extensions that seem to be coming from Chancellor Rishi Sunak to keep businesses alive until that latter point on the success of the fourth step in, in June. So at the moment, cable remains quite elevated. Um, in the overnight Asia-Pacific session, we have retested once, and again early birds in Europe and last night or late afternoon London time. So 1.4086 is a strong area of resistance now, a short-term intraday in the futures market any pullback here, um, was just keeping an eye as price was slightly dipping into the low of the close of Wall Street last night. So 1.4059, we've just seen a bit of reversal there. So at the moment we are trading a relative range-bound trade here in cable, and that, that could well remain the case until Powell speaks because that will be the major catalyst probably for these major base dollar pairs in reaction to the greenback sees to what Powell says. Any downside here, I'd say the next good level of support seen down at Pivot, which is around 140.46, 45, which would encapsulate some of the price activity that we saw during yesterday's session. And then much lower down, sub-140, these kind of areas as marked up, 139.82 and 53. But we'd have to see— to get down at these lower levels, we'd have to see a real kind of hawkish twist from Powell, who would pay heed to the fact that he is going to get responsive to the recent yield move, the reflation threat, rise in inflation expectations, meaning that they might start having this tapering discussion. Must stress, I do not see that happening today, but that's what would need to happen in order to see the price challenge down at these lower uh, levels, but to give you a rough guide. So it could be in for a bit of consolidation there until he speaks. He's not speaking until 3 PM, so a bit later. Elsewhere in the precious metal space, um, the, the weaker dollar just helping out a little bit. We had a, a nice break here of a level we were watching and talking about in the briefing yesterday, which was around $1,793. I know one of the traders got hold of that. We had the break in the morning, the pullback to that key level before, around the US Open and the open on COMEX, and then a really nice push. And they managed to get that trade in for, you know, a good $25 gain. So really well done and well executed on the exit. I know they pretty much got out of it to the tick up and around that zone that we'd marked, up around 1812-1813, which was those areas of support that we had back, uh, going dated to the, the kind of 12th and then the 16th of the month. We have found now a bit of resistance around there. Even in the Asia-Pacific session, it's failed to really push on through there. And so that could provide a bit of a cap now to price for the meantime, until again I think Powell speaks. It could well be a meaningful trigger for, for price upside levels. If we do continue this resurgent kind of trend in gold, I'd be looking at next target probably other than the Asia-Pac highs around 15, then 18, 17 would start to bring in some of the price activity we were seeing from the 16th, and then just a few days before that as well as an area of support. But as you, as you can see though, price just backing off here as I'm talking, back to flat now on the session. And then the other one I just wanted a quick word on before we get stuck into what to expect from Powell was Bitcoin. This was a chart I'd had up from, from yesterday that I was sharing in the Amplify kind of Discord room. And, you know, as I wrote in my notes on Sunday that I shared, I did feel like, you know, I'm no Bitcoin expert, but the price activity, I thought, since we had gone above 50, just seemed awfully stable. Um, we, as since we, we had that Tesla pop really, and we, we went through— this is going all the way back to here, um, when Tesla invested in Bitcoin back on the 8th of the month. You know, price has gone from $40,000 up to $58,000 here looking at the futures. And I just thought that given the acceleration of the lift that we had on Friday going into the gap up, um, obviously having touched nearly $60,000 over the weekend And with the, the slightly more pessimistic tweet about the current price of Bitcoin from Elon Musk at the weekend, just felt a bit inevitable that at some point we were going to see a fairly aggressive snap back. Again, this is just the Bitcoin asset. I don't think this is the beginning of the end by any means. It's just a healthy pullback really when it comes to price movement for this, this, this asset to sustain, um, something more meaningful to the upside. So yesterday we did come off about 16% at the low. We've had another retest here down at the 49,000, and it's bounced off that early doors this morning, European open. I do think that's a very important level for the Bitcoin future, um, today. If that is broken, then I think we trade pretty heavy, pretty quick. 48,000 would be that low here going back on the 6th 15th, and then I'd probably be looking down at around, uh, $46,470, which starts to encapsulate some of the price activity from the first half of the month. And anything lower, $45,000, then $43,000. But again, given the fact that we've already corrected in price here a good 15% or so, it could be that $49,000 is the floor for the moment, and we might consolidate for for today between 49,000 and 51,000. But we'll see. Okay, let's have a look then at the major event of the day, and that undoubtedly is your main man Jay Powell coming out with his semiannual testimony. So he speaks twice. So just to get everyone up to speed if you're new to markets, he speaks to the Senate today and the House tomorrow, and they are basically a copy-repeat, just to the two different chambers of Congress. So Tuesday is ultimately much more important because it's the first time we get to truly see what he has to say. Wednesday is a non-event. So here, as the bullet points are kind of suggesting, it's the main event of the week because recently we've had a bout of optimism, and that's been reflected in this this obvious trade that we've had in this reflation view, which is based on the notion of an acceleration in vaccinations in tandem with more fiscal stimulus coming. For example, late last night, the US House of Representatives Budget Committee approved legislation for the $1.9 trillion new coronavirus relief plan. Uh, the full House could well then look to push that bill through later this week, and we're still yet to hear the details about the infrastructure plan, of course, even more stimulus that's due to come from the US administration. And this, of course, all comes amid loose monetary policy, which the Fed have committed to thus far. And I guess therein lies the key, uh, because all of these aforementioned reasons have resulted in a rise in yields, which essentially is a reflection of an improved, um, view over growth prospects in the future. Now, at this point, I would say my view, and I would say on the balance probably the one shared as a consensus view on the street by majority, is that Powell will reiterate that the Fed will commit to its existing course of action. And what does that sound like or look like in terms of the text the Fed might adopt? Well, the Fed are not contemplating any immediate shift in their policy, and the stick with the guidance that they will continue to buy $80 billion of Treasuries and $40 billion of mortgage-backed securities per month, quote, "until substantial further progress has been made toward the committee's maximum employment and price stability goals." Again, by referring to those metrics, we're still a long way from having that discussion about tapering down their bond buying program. The Fed's preferred measure, the core PCE price index, is coming on Friday. That's still going to be well below 2%. In terms of the, the employment situation, as we know, that is still kind of readjusting in the post-pandemic environment at this point in time. Um, a lot has been written about the parallels for the, um, for those who are in markets that will remember 2013 being the kind of infamous taper tantrum. And there is a little bit of inevitability that at some point the Fed will create a degree of tantrum in the market because ultimately they need to signal at a point in future, whether now or in the coming several months, that ultimately the speed of the bond buying that they've been doing as a reactionary effect to kind of save the economy in the pandemic environment needs to slow down. And it needs to slow down for good reason, because the economy is starting to function again and respond to a lot of these stimuluses from the fiscal and monetary policy side of things. Um, I guess then there lies a couple of things. Now, there's a really good note written by the guys at ING. I did share that in the community last night, but I also tweeted a few main nuggets of information for my Twitter account, which are definitely worth reading. But essentially, they said that although tapering doesn't mean the Fed simply stops buying bonds. Again, it's a really important thing here not to misinterpret. Tapering doesn't mean bond buying $120 billion one month to then zero. It means they just start to scale it back, they taper it back. But remember, markets are forward-looking. As soon as you start to taper it back, the markets conclude then, well, you're saying it's going to finish in the future and then you're going to start normalizing rates. And that's what spooks the markets essentially. And it's this idea that the faster that happens, the worse the mood in the bond market and the more intense the tantrum. And there's a really good analogy that they used about, you know, I for one, I've got a 2.5-year-old toddler at home. She's probably just getting up by now. And the idea that, you know, to teach that toddler a lesson, sometimes it's going to come with a tantrum, and you have to manage that. It's inevitable at some point. And, you know, I do think then that this is the tightrope that essentially Powell needs to walk. And do I see that being a major moment for markets? Yes. Do I think that that's going to come as soon as today in a testimony? No. I think it's just a little bit too early for that at the moment. So interestingly, even though that this is a real talking point, more much so for the Fed than any other central bank, Christine Lagarde obviously came out yesterday and we did see quite a dramatic drop in German yields firing up the 10-year Bund, uh, in the futures market yesterday. Now, as much as I didn't see too much really new in her comments, some have said that the fact that she said the ECB is closely monitoring the market for government bonds is a sign that she might act to prevent rising yields. So this idea of further tweaking, using the all, all kind of powers that be at her disposal to try and maximize the envelope of that, that pandemic emergency purchase program. So again, paying heed to the idea that, look, we're not at the point yet of taking the foot off the gas in order to instill then and ensure an economic recovery post-pandemic. I say post-pandemic, we're in the pandemic still, so there's still quite a bit to play for. So in summary, I think Powell generally is going to reiterate the, the ongoing Federal Reserve stance. And I think the important thing for market reactions afternoon when we see these comments is that the market has seen quite a distinct shift higher in yields. Equities have, as I've mentioned, have had some of their longest losing streaks we've seen in a while. So I do think the market is a bit susceptible if Powell just comes out and reiterates a more dovish accommodative stance, that equities might have a bit of room to just recover a little bit. You know, are we going to fire up and move immediately to all-time highs? No, we're a little bit far from that in current price. But I do think that given market positioning I think T-notes potentially could get a bit of a kick, not so much again by what Powell says, more so than what he doesn't say. I don't think he's going to allude to this idea of runaway optimism over vaccinations and, and growth prospects improving. He will want to strike a cautious tone, and that will then lend its hand to the idea that the Fed are going to stand put for for now. And just given, you know, this is the US 10-year over the course of the last 5 or 6 trading sessions, and we've moved meaningfully lower under the pressure of rising yields. And it'd be quite interesting to have a look at how we react around this 3517. If we can break above there, you've got that low which is kind of coinciding around the R1 today at 135.20, and then perhaps even a further push-up could be on the cards, up towards the 136 handle, which obviously then starts to be quite key as a level on the upside on any price recovery around 02, which is those lows and highs you can see there. So yeah, it's going to be an interesting day. As I said, I think the Powell situation could well see a bit of a short-term reversal of some of the activity we've had of late. Given the fact that, um, I think markets are just a little bit ahead of themselves in the timing of looking for, for Powell to change it from a policy communication perspective. If he does go as expected, then that should in a sense then keep the dollar fairly depressed. And the DXY is trading around 90. And just a quick word on the DXY, I do think this is a key level we're trading at at the moment. And so let me just zoom this in a little bit. If you're talking about the year-to-date price action that we've had, just going to put my cursor here. Although we have broken through this, it was a little bit choppy at the beginning of the year. Really going back to the 14th of January, 90 has been a relatively solid line here to keep price above that point, and we're just flirting with it at the moment, having briefly dropped to around 89.93 in the overnight Asia-Pac session. So there is room here, um, if Powell again just reiterates that, that kind of accommodative stance. If the dollar starts to break lower, that could get a bit of a run. Well then, remember, these major pairs could see some further breakout to the upside in EURUSD and, and cable. I'd also probably see that supportive, keeping an eye on those upside resistance points in gold and also potentially to keep a further floor on oil prices as well, as the weaker dollar will probably lend its hand as another supportive factor there. So kind of then, it's kind of a perfect storm for something like oil, where you've got an OPEC+ committed to generally enacting their supply pact. You've had this temperature freeze in Texas in the US, and we're still trying to get over that. You've then got the general recovery prospects improving with vaccinations and fiscal programs, which helps demand. And then you've got the Fed sitting there keeping the dollar on the back foot. And so it's kind of like a perfect storm if you were looking at a few of these commodity prices, particularly in WTI crude. Otherwise, just to wrap up, what have we got on the session in terms of calendar events? So a few different things we can just have a quick look at. The UK jobs data has already come out Uh, the unemployment rate 5.1%, as expected. The UK average weekly earnings 4.7% against expected 4.1%. As you can see, not really any reaction in sterling, and I wouldn't expect it because ultimately it's difficult to really read too much into particularly unemployment data coming out of the UK. I believe Rishi Sunak is expected to roll over things like furlough even further to accommodate then the, the 4-step procedure of reopening the economy. And so looking to just buy time until that unfolds. So not to read too much into that data. As I said, I think the dollar is going to really dictate the cable currency pair. The HICP final numbers, they're final, so I wouldn't place too high a priority on those. So then really we get into the afternoon, there's no major 1:30s coming out of the US. And then the main event, Powell, is at 3, comes alongside US consumer confidence, which will be absolutely overshadowed by the Powell comments for sure. API inventories later on in the evening, and then you've got some fixed income supply, longer dated, out of the DMO in the UK, $60 billion in a 2-year note auction in the short end coming out of the US Treasury as well. So that is it. So yeah, a bit longer for the briefing, so Hopefully you, you managed to stick with me till the end. Um, obviously if you did, then any questions, let me know. Uh, just hit me up in the Discord chat or just drop a comment if you're watching this on YouTube. Absolutely happy to help. And yeah, good luck for Powell this afternoon. Let's hope it's, uh, let's hope it's an interesting event. All right, take care, guys.