What To Expect From The FOMC Meeting Today

Okay, very good morning to you. It is Wednesday the 29th of July. Hope everyone is doing well. I'm going to run you through some of the morning's headlines and kicking things off straight away with the general sentiment here at the European Open. It's just around 7 AM now here in London and we've got a little bit of a pullback in the dollar. I'll After what was the dollar index snapping a 7-day losing streak yesterday, moving a little bit higher, the DXY has actually backed down about 0.1% this morning and retesting about the lows in the DXY of where we were trading about midday yesterday. So worth keeping an eye on any further extension, of course, of that overall trend we've seen of late of dollar weakness going into, of course, the Fed tonight could well help then underpin support for these major currency pairs. So EURUSD, and cable up a touch, about 15 pips each respectively, here in the top left-hand corner of my charts. So euro just coming up and close to testing here around the high points that we were seeing from the session midday yesterday. And also you can see that was a support point as well from late on Monday session. So worth keeping an eye here on the euro. Any further extension, then you've got the R1 just above And then the weekly highs would be residing just below that 118 level. Uh, in cable as well, similar type of price movement. The overnight Asia-Pacific high would be the first line of potential resistance. You can see here, uh, if we continue to see an extension of some dollar weakness, uh, so 129.42 in the futures, and then the high that was seen yesterday evening wouldn't be too far away, about another 15 pips or so from current price action. Equity index futures, US pretty flat overall, minor positives in the NASDAQ and, and basically unchanged in the S&P. The DAX, though, a little soft. We'll have a look, couple of earnings reports, particularly BASF, uh, are seen down pre-market after their earnings report. We'll have a look at those in a moment. Otherwise, elsewhere, T-notes are unchanged, very quiet price activity, absolutely sideways in the overnight session. Pretty minimal reaction seen in WTI crude to the API numbers we had last night, but we'll recap those numbers in a moment. And then gold, we'll get that chart up again and look at that in a bit more detail. A few things to talk about. Obviously a big bout of profit taking, I would say, more than anything else, given the momentum move that we've seen occur in gold, um, kind of capitulate almost on the breakthrough of those all-time highs in the last 48 hours or so. But we're almost right back into that trend, moving higher again this morning, up another $8, $9, and having reclaimed back to around a 1950 handle now, having dropped down to around 1900 yesterday. So that's the general, um, theme of things at the moment. One thing I'll say right now is do not forget to join us later on this evening. Myself and the team are going to be covering the FOMC live, so all you need to do is just like and subscribe to YouTube channel, hit that bell icon and then you'll get a notification as soon as we go live. We'll go live about half an hour before the actual Fed announcement, in good time then that me and the team can run you through exactly how we're going to cover it, how we're going to trade it, and then we'll do the whole announcement in real time and share everything with you. So hopefully you can join us then. But let's just run through some of the headlines. What have we got now? Interestingly, yesterday a couple of things that were coming out Obviously you had earnings seasons really picked up pace this week and you had a couple of big Dow components yesterday disappoint. So worse than expected results, the likes of McDonald's, 3M, you know, these are sizable companies and there's more earnings reports of course to come. And the real big day comes on Thursday after market when you get those mega-cap tech names. But Couple of other things as well. We've had the index of consumer confidence we had yesterday, obviously dropped significantly on the onset of the pandemic. But if you think about where we were generally with this very strong V-shaped recovery we've had in market prices, people were kind of quite positive by what we were seeing with these big outperformances in economic data. You remember about a month ago I was commenting quite frequently on the Citigroup Surprise Index, and we were always outperforming. It's kind of the natural way of which human psychology tends to work, is that when we're very depressed, we're very depressed. And so therefore the numbers come in, and it was quite an easy kind of beat almost because we were so down in the doldrums on the back of the severity of the, the health pandemic situation. So now though, things have started to change as the economy has— as well as markets have stabilized and we've rebounded so sharply, the bar has got kind of ever higher now for, for expectations to be achieved. And we started to see a couple of misses accumulate. And in the index of consumer confidence was no different yesterday, coming in at 92.6. That's a fairly— I mean, I know it, it's hard to look at it in context of just a sharp drop that we had, um, with the pandemic, but don't forget we were at all-time highs here in this particular piece of data. But a drop from 92.6% from 98.3% is pretty sizable, and it was below, of course, expectations of, of 95% as well. So largely a reflection, of course, of obviously what's been happening in North America over the last 4 to 6 weeks, which is going to be really key for the Fed, of course, is this whole development around the second phase, if you like, of the global COVID situation, particularly in North America, where If anything, it's got materially worse over that period of time, and that's obviously dented and fed through into lowering of consumer confidence. The other thing then is what we had last night, and there was some news out from the Fed. They've almost front-run a little portion, if you like, of what we're going to hear probably later on tonight. And they have gone ahead and basically they've extended most of its emergency lending programs by a period of 3 months. That will take it through then to the end of the year, the remainder of this year. The extension applies to 7 programs. The Municipal Liquidity Facility, that was already set to expire at the end of the year. The Commercial Paper Funding Facility was due to end in March of 2021. But to give you some context, there's about 11 emergency facilities ongoing at the moment. Here's just a kind of overview of a couple of the main ones. And as you can see, the blue lines here with the black line— the black line actually indicates then the amount of usage that that facility has actually had. So the only one that's seen any degree of significant usage has been the Paycheck Protection Program Liquidity, the PPP LF. But you can see even that has only been used to a fraction of actually the amount of which it has signed off capacity for. So the idea here, it's almost like the Fed, in my mind, um, are conscious of the fact that we're at a bit of a tipping point here where things have, if anything, got materially worse on probably one of the most fundamental risks to the economy, that being COVID. And we're likely to hear a somewhat then reflected in a dovish tone from the Fed generally tonight more repetition of that 'we'll do whatever it takes to support the economy' type vibe. But to me, this extension is kind of like the, the arm over the markets. It's like, look, all these facilities are here. I'm just reminding you, I got your back. Don't worry, things might get worse as we go into the winter, you know, as, as things develop. But it's okay because we're going to extend this out 'Whether there's a fiscal package, we're pushing for that. Whether there's not, we're here to support the market.' So I think the Fed have always— no one can say that the Fed have not— have underdelivered. They've overdelivered in almost every single step that they've taken. They were the first to take the emergency inter-meeting cuts of rates globally. They were the first to deploy a lot of these different programs, and these programs cumulatively account for trillions of dollars worth of potential support to the economy, of which has only been used to a fraction. So I think this is quite a— yes, there's a function to what they've done by extending a lot of these emergency programs, but don't forget, hardly any of them have really been used. So this to me is more of a tactical move to deploy now in order to alleviate any forthcoming tensions, which don't really exist right now, but it's to offset it in the future, just to remind the markets that, look, we're here, as I said. So I think a good move by the Fed and one that certainly we'll be looking out for more information when Powell speaks, of course, in the follow-up to the statement from the Fed later on tonight. And on that point, you know, you know, what are we expecting from the FOMC? Well, as I said, we're going to cover this all live, so all you need to do, as I said, subscribe to the channel, um, just hit that bell icon and you'll know as soon as we go live. Um, we're gonna go over things in full, but to give you a general overview of generally what people are talking about, I mean, the markets for one, uh, are, as I said, functioning relatively well at this point in time. Longer-dated yields remaining at such low levels, the Fed has little need really to alter too much its language or stance at this time. There's a lot of things that people are looking at— any tweaks to the balance sheet, this idea of yield curve control, this idea about their inflation kind of monetary targeting or forward guidance— but the things I've read would indicate that most people on the street are looking at that any of these types of changes if happening at all in the future, are more likely to happen when we get back into September. Because at the moment, it's one of those things, isn't it, where as long as everything is okay, is there much need to keep offering more and more substantial policy changes? You really want to keep that ammunition back to deploy it later on when then things, if they materially change, you've got an ability to adapt and help support the market further. If you fire off your bullets now and things do materially worsen over the period of the next 2, 3, 4 months as we go into the autumn, then, then where do you go? So I think that the, the Fed's move to extend the emergency lending programs was that to a certain degree, but a soft kind of level of that. Remember These are more mechanical, more functional for liquidity in the system. What the, the monetary policy changes is different, different side of things, and that I don't think that they'll want to do anything more, and I don't think they should do anything more just yet. So a few, few points here. Um, the committee will discuss changes to its forward guidance for interest rates and asset purchases, as well as framework for monetary policy decisions. So they'll discuss it, but it's likelihood then any final decisions of any potential changes will not come— most people are thinking until September. Um, Powell likely to reinforce his message, the usual kind of rhetoric: we'll do whatever it takes, we'll use a full range of tools, repeating a call for fiscal aid from Congress, putting the pressure on for the politicians particularly sensitive right now given the looming expirations of several of those programs we've been discussing this week on Friday. Um, since the last meeting, obviously the COVID situation, as I, as I mentioned, has got worse and perhaps even more uncertain. So be really interested to see what their updates are on that point. And on balance then, does that open up, if anything, reasons to be even a little bit more downbeat in your assessment of overall things? And if so, That probably explains already some of the dollar weakness and the yield movement that we've had. But does that extend again when we get confirmation of that later on tonight? Will be interesting. The Fed has discussed linking its rate path to reaching, or importantly, overshooting its 2% inflation goal, or to an unemployment rate objective. A lot— they've been talking about this, particularly about refining their forward guidance kind of technique, um, the idea then that they could allow inflation to overshoot and that wouldn't then require them to— what is currently the process— to start lifting rates. That in itself then has been one of the reasons it's been pressuring yields even lower, because the Fed might well be more open to flexibility on that inflation target, which if anything then means that there's a way higher bar then if they're to raise interest rates in the future, meaning that they're unlikely to do it for an incredibly long period of time. So, uh, the Bloomberg survey though of economists has suggested that nothing on that is likely to materialize until September. And then Fed officials repeatedly suggested they are not close to targeting rates on Treasuries. So this is that framework which would come under the kind of title of yield control that we've seen adopted elsewhere and by some of the other central banks like the Bank of Japan. Powell in June said that they were studying it, it was an early stage thing, but again, the latest Bloomberg Economist survey suggests now that no one expects that to happen, yield curve control, um, at all to be adopted. So yeah, a couple things there. As I said, I'm I'll be there to kind of guide you through. I'll recap a lot of these things later on tonight when we talk about it in more detail. Interestingly then, as I just said, yields have been declining. The US 5-year real yield and the gold price have, have basically been seeing a clear divergence here, and that's been one of the underlying kind of reasonings why The gold market has been, you know, so on fire of late. And on that note, let's just have a look at the gold charts because certainly, you know, for any new traders, it's, it's so tempting obviously to, to get involved in an asset that's showing such phenomenal movement. But the problem that you have then is that an asset, when it starts breaking all-time highs, like what we saw in this period here, starts to trade then quite from a behavioral point of view, um, and that being on the notion that there's no really historical technical reference point. And so you get a lot of this momentum move, and particularly in a product like gold, you get these big flushes of price movement. And yesterday then, what we had was after that massive big push-up, what I can just encapsulate into nothing other than really profit taking. And at that point then, I mean, we already had these— these are the two rectangles we had marked up from, from yesterday's briefing, and we were looking at really two key areas. And one was that, that trend line, which obviously got broken through, but that was the pivot in yesterday's price session, and also those respective lows here. So that was a key level, and you can see then how the market reacted here. And this is why the technicals are so important when an asset's moving in kind of a momentum-based situation, because it acts as a trigger point then for the secondary flush in price. And so here then, after we came back, you can see we bounced very aggressively first of all off that exact technical level that we were looking at, and then broke through right into those areas where we were kind of looking at these highs here, which was then the 1900 level. And it basically, in the futures at least, it bounced all the way literally to the tick to 1900. And this is very common then of that, again, that momentum ignition kind of move where people were targeting key technicals and key psychological levels. And very evident yesterday with that 1900 being targeted, then almost immediately bouncing straight back up $25. And then again, that pivot floor seen late yesterday afternoon, and we've pushed all the way back up in the overnight Asia-Pacific session north of 1950, where we trade again today. So here, near-term price levels of significance— obviously that overnight Asia high will be key. I definitely think we should also mark up higher levels such as the all-time new high which we printed yesterday's Asia session, so 1974. Um, then here on the downside, the pivot at 1941.42 is actually quite a nice level on the downside. Now again, you've got to be familiar or just aware of the, the ability though, if you're, if you're nursing these trades, got to keep it relatively tight because if you get on the wrong side, obviously you can see quite a big snap lower And so you want to have the ability to just get stopped out on that trade if then it doesn't respond to that long positioning, playing that range kind of low to get back long again. On the downside, if we start triggering back down lower again, well then I'd be looking basically here and then that previous low again. So the key 3 areas of support I would see in an intraday basis for gold would be down here, 40 ones, then that 25 again, and then down at that sort of 1900 to 1904 type zone would be quite key. Now on the gold front, a couple of different things here I want to mention. Um, I did put out a poll last night on Twitter. I'm always interested to, to see where your guys' heads are at. We've got about 400 votes here. So a decent amount, relatively small sample size, but I put out the question: where do people think gold will be by year end? Uh, sub-1,500, 1,500 to 2,000, 2,000 to 2,500, or above 2,500? And you can see here the, the highest, most popular call for the year-end price for gold is to be sat between 2,000 $2,500, again higher than where we are today, and of course breaching that psychological $2,000 level. Now on this point, Will and I had a conversation about gold yesterday morning. I did share that on our YouTube channel, so do check that out. A good conversation with him because he's always, you know, gold's probably his most favored product to trade and he's been in it over the course of the last few years, uh, and he has got a nice interesting perspective really looking at how history has repeated itself in previous occasions. We were looking back at when we initially hit the 1,000 marker and then how the price activity was responding around those levels, and when it breached, how quickly it ran up to 1,250, and then 1,250 to 1,500, and 1,500 up to 19 $2,020, which was the previous high. So there's definitely some, some lessons out of historical price movement, and also his calls for why $2,500 in gold, yeah, is not an unrealistic target under these types of conditions that we're witnessing at the moment. So yeah, check that out, that video, good conversation. Elsewhere then, from an earnings perspective, some things that we do have today pre-market, the ones you need to really be aware of from the States, is going to be Boeing, General Electric, uh, and then aftermarket you've got Facebook. So one of the big tech names before the other big guns come out tomorrow. On the European side of things, Deutsche Bank, you can see in pre-market here, are up about 2.6%. Uh, their Q2 net revenue is $6.3 billion above the expected $5.94 billion. Their FICC trading revenues, um, above expectations. They said they have strong capital position providing scope for growth, uh, revenues anticipated to be essentially flat for the year versus previous view of slightly lower. So actually, uh, on the balance of things, quite positive update from Deutsche, and their shares are up about 2.6% ahead of cash open shortly. BASF though, one of the other big large weighted companies in the DAX. They're on the right, on the other end of the table. They're down about an equal amount to how much Deutsche are up, so they're down about 2.5%. Uh, their sales came in below expectations at €12.68 billion. They said negatively impacted by slightly lower price level. Um, their adjusted EBIT came in basically in line with expectations. They said they cannot provide a full year guidance, uh, does not expect EBIT before special items to improve significantly. Versus their previous, um, given seasonality effects as well. So a bit of a mixed bag there. BASF down about 2.5%, but you can see Deutsche still adding to some pre-market movement at the moment, up about 3%. Then in the oil market, uh, I don't think it's necessary for me to really get the price up. There wasn't really too much reaction to this information last night, but again, it acts as our reference point for the DOE's later on. Um, the crude figure in the API last night was a draw of 6.829 million, which was quite large comparative to expectations of a draw of just 1.2 million. Cushing, though, um, was a build, as was gasoline, both to the tune of around 1.1 million. Distillers was a build of about 187,000. Looking at the calendar for today, um, it is actually quite quiet. Um, mortgage approval data coming out the UK is not really a market mover as far as sterling is concerned. Then we go into the US afternoon, you do have pending homes sales. You've also got the advanced goods trades balance number coming out of the US, and then the oil inventory numbers in the DOE. And then the tension though, the main event will be the Fed. So perhaps worth keeping that in mind if the calendar is quite light, um, X-ing out any potential kind of Trump rhetoric on China And, you know, barring no unsurprising comments from there, it could well be that the market respects its relative near ranges, and then we just kind of lead into the Fed, and then the market will take its cue from what's said there for later on, for then to dictate then some of the price movement through Thursday until we get those big mega-cap earnings come out at the end of that day on Thursday. The other final point is keep an eye on Capitol Hill. They still really haven't signed conclusively this deal yet. The latest is that the $1 trillion pandemic relief package that's been proposed by the Senate Republicans that we were talking about yesterday has been met with very intense resistance from the Democrats. They're particularly unhappy with cutting the enhanced unemployment benefits from $600 to $200. The actual plan in itself itself has also reportedly caused deep divisions within the Senate Republicans themselves about their own relief package. So still quite a lot to play for here, and that does carry an inherent risk to markets if they can't come to some overall compromise and conclusion to push this thing forward, because the deadline of course is on Friday for some of these programs. So keep an eye on that as well. All right, that is it from me. Gonna wish you a good day, and hopefully I'll see you online later for the Fed. Take care.