Why The US Treasury Refusing To Extend The Fed’s Crisis-Fighting Tools Could Spell Disaster

Hi there, my name is Anthony Cheung. I'm the head of market analysis here at Amplify Trading. If you'd like to access our private chat room to exchange trade ideas with professional traders from around the world, then check out Amplify Live by following the link below. Okay, very good morning to you. Hope you're doing well. It is Friday, the 20th of November, and I'm going to get up to speed with some of the kind of top-level macro fundamentals in focus this morning. Going to focus on a couple of things. Comments out of Steven Mnuchin last night, which bumped US equity futures down late in US session, after market. We're going to talk about the COVID-19 situation in the US, the vaccine updates, and maybe a little slice of Brexit as well, just to throw in there because there's been an update again this morning as those talks intensify. So let's kick it off and, and talk about the charts to start with. And yeah, let's, let's broaden out some of these US equity charts. And I've continued to keep a running kind of dialogue on the chart to make it as easy as possible for us to have these discussions, to make sense of what's been going on, particularly in the context of the week as a whole. Always nice on a Friday to just put the the whole pieces of the puzzle together to look at where we're at, and then overlaid with the technical setup of these charts. And these were the comments that came out last night. I'm going to go over and recap what exactly the Treasury Secretary said last night and what the impact of that could be and the details. But for the moment, the market reacted negative when those comments came out. It was after the closing bell. You can see the S&P dipped and we came back down to the prior day's low, which has held a couple of times. And actually, on the daily pivots today, this is going to be a really crucial area of support should we retest down on the downside. Uh, we're trading— we have bounced back up through the course of the Asia-Pacific session, and we're back to pivot. But if we do get a retest today, that 3542.5 will be a very important level for the S&P, not only for the last two sessions but also it is the S1 on the daily pivots. Any break of that, then the S2 comes in at 21, with 18 being the low that we had, uh, this time last week, in fact, on, on the Friday, on that double bottom that held, uh, on Thursday going to Friday session. So yeah, definitely they would be the key levels on the downside. I keep an eye on any recovery here on the upside. I'd probably be looking up at around 74 84.25. That would bring in that high that we saw before the, the dip in yesterday's session in the morning when Europe came in. And that was also a good area of resistance back on the 11th going into the 12th before the eventual break higher that came late in Friday session last week. So on the upside, beyond that point, 82.75. So these are the kind of the more key big areas I think, of technical relevance for the S&P at the moment. So 82.75 on the upside and 42.5 on, on the downside. That upper level, you can see then not only the high from the pre-Munich comment when we had a little squeeze into the close on Wall Street, very moderate outperformance from the NASDAQ, some of the tech stocks, tech stocks, and those stay-at-home names on a single-stock basis outperforming again, just given the, the pickup in COVID and ensuing restrictions we're seeing in North America. But then that comment obviously bumped things back down again. But you can see here that high with those lows that have held through the week on Tuesday and Wednesday session, as well as that initial then closing high that we had on Friday last week. It's quite a key level on the upside. I'd be keeping a close eye on today if we move to the upside. The Dow tells a similar kind of story. So just making that a bit bigger, we'll have a quick cycle through some of these charts before we get into the headlines. And yeah, this is bringing in the full kind of story from the Pfizer bid, that super aggressive move that we saw in that first outline of the details on their stage 3 trials. We had the Moderna bump to retest to the tick and a doubt up at around that 30,000, of course, on the double top. We've come back a fair amount. Uh, and now looking at this Dow chart this morning, the kind of areas that I've marked out that I think will be significant in the interim period, around the pivot, just below it, you've got this area that's been important for price when above and below, which is around the 29,300 level, the pivot coming in just above there, about 320. On the upside then, you've got that midweek low with the rejection we've had twice in yesterday and the overnight session. And so that's going to be a key area as well on the upside if we, if we push up for a recovery today. And on the downside, any breach down towards the overnight low, which would be then on the daily pivots, the S1, then you've got that also low that was seen on, on Friday last week before the push-up. So 29,137 would be quite, quite key there. So that's the kind of range of activity I'd be looking at for any more kind of forceful price movement. Otherwise, in the other markets, the other one I wanted to have a look at was the US 10-year. And as you can see here, I've just put a few things on here. One is the, obviously, the, the initial knee-jerk reaction with the Fed Pfizer information is that, you know, it's kind of the interpretation at the time was this kind of accelerates then the recovery, the kind of world post-coronavirus. Obviously, it's just been decidedly short-lived, as this chart kind of suggests, because after that initial yield spike that we had back on the 9th, last night in fact, into the close post— just closing bell on Wall Street, T-notes were actually trading up, completely taken back that entire move. As the COVID-19 situation obviously worsens, we're a way off from getting any stimulus on Capitol Hill. And so all of these things are back in play again. And as you saw, you know, X-ing out the bounce we've had since Europe has come in, the dollar, after, after surging higher around this time yesterday, came all all the way back down, and that coinciding then with yields also declining at that point. And we've come up to a fairly interesting level around 1.3819. I've just put on these trend lines here from the price recovery that we've had, and this is taking from Friday or last Thursday at the low here, price activity. So kind of looking at this at the moment with some interest. Um, Mnuchin comment obviously bumped things up, and we just ran into resistance at around what is the R1 today on the daily pivots with that trend line. I think it'll be quite a key area of resistance as well to have a look out for. Again, in terms of getting up there, perhaps if we see an equity sell-off and it starts to look heavy going into the weekend, then if we get any breach above here looking at the trend line, then you've got the R2 and then that eventual high that would come in up at around the 9th just prior to the Pfizer news breaking, uh, that I'd be keeping an eye on. Otherwise, in the gold and oil market, I'm not really going to go into those in detail because not too much in the way of, uh, of interest right now as we're speaking. In the currency markets, as I said, the dollar dropped considerably during the US session, so we've come back down to test— remember that really super important key level on the higher time frames in the Dixie, which if broken would be a meaningful kind of trapdoor potentially for quite extreme and rapid dollar weakness. We have bounced again this morning in Europe. I guess what I'll be quite interested to see is how big are these kind of rejections off that support break on that level, and if they start to get continually more shallow I think it could be quite interesting to watch, even more so when we layer in, as we'll discuss, what Steven Mnuchin has done, which I think for me personally is, is a negative thing for the dollar, which I'll explain in more detail. Otherwise though, for the moment, a bit of a dollar bounce though for right here, right now, just coming off that more aggressive selling that was seen late into the US session and overnight in Asia. So the pair's just taking a bit of a turn here. Okay, we're back to pivot. On the Brexit side of things, you'll recall yesterday there was a halt to proceedings. They're now moving to virtual meetings given that one of the European group, they're basically going into quarantine because of COVID-19 case. So the latest this morning is an EU envoy has said the 3 main Brexit hurdles So when they say 3 main hurdles, they're referring to fishing rights, level playing field, and state aid. So those 3 main points remain unresolved and the UK has not moved on these issues. Talks will continue. That was the latest that's just come out literally a couple of moments ago. So I can't see how anyone can find any of this surprising. As much as they continue to say they're going to strike a deal, I still find it incredibly hard to believe that as soon as today or even Monday, which some press sources have indicated. So keep an eye out for it, still ongoing. Obviously they're in virtual meetings. I would expect probably some more Brexit comments to be coming out, not just today but also over the weekend as well. All right, well, let's get stuck into some of the news. I'm going to give you a quick recap of the COVID situation, and then I'm going to run through this whole Treasury Secretary commentary from last night. So starting off with the US, case numbers continue rising. I'll keep this as short as possible. Uh, has led to some commentary out of the CDC. So the CDC, the Center for Disease Control and Prevention in America, someone you hear about on a fairly regular basis in terms of their commentary, they've urged Americans not to travel on Thanksgiving. And we talked about this a couple of times. This is a really— it's going to be quite a pivotal moment in terms of the future development of this virus in America, given the fact that adherence to social distancing and group sizing rules in regards to gathering is going to be absolutely critical. Otherwise, what is already a fairly bad situation could get much worse very quickly. Over the period of then going into mid-December when we'll start to see any types of emergence of renewed cases given the incubation period typically of the virus. So they're already doing that and that's led to a few other things. So I'm just cycling through yesterday's death count. If you'll notice here, I know it's a bit hard to see because it's gray, but on the far right-hand side you've had big spikes now in the death rate. So this is that catch-up we've been referring to from the lagged effect of the death rates to the, the counts that the case acceleration we've been seeing. And so the last 2 days you effectively had death rates of near 2,000 which haven't been seen. You can see we've got to go back to, you know, we're getting from May pushing into April toward the peak now. And so as you can see, the 7-day average is getting ever more steeper. And as we said before, we're anticipating that that pattern will continue for the time being. It is putting pressure on the infrastructure in, in the US. Almost 80,000 patients are hospitalized with COVID-19 in the US at the moment, another high in a week that has pushed up the record every day since the 10th of this month. So the last 10 days is when we breached the kind of peak of hospitalizations that we saw the initial tri-state and then Sunbelt outbreaks that we had in the spring and summer. We're now well and above that at the moment. This is causing further restrictions then, and restrictions in very key areas economically. We've had California Governor issue a stay-at-home order banning non-essential work and gatherings from 10 PM to 5 AM. It's going to go in effect on Saturday and will last until December 21st. So a curfew being implemented there in the state of California. And then equally so in the New York City— in NYC, the mayor has come out and said it's just a matter of time until the state orders a halt to indoor dining, and a shutdown is likely to come in the next week or two. This of course follows the shutting down of the entire New York City school system, which is the largest in the country, of course. So things are happening now on that front as the situation continues to escalate, and that economically is going to be interesting because of particularly what's just happened with what the commentary that the Treasury Secretary has just said. Just to round this off, there's a few other things on the vaccine front to be aware of. The World Health Organization has come out and recommended against using Gilead Sciences' Remdesivir to treat hospitalized patients less than a month after it received regulatory approval. They've come out and basically said that there is currently no evidence that it improves survival or the need for ventilation. Again, the Remdesivir therapy was not about a vaccine to cure against— immunization against COVID-19. It was about then the ability for people to recover quicker. This was something I believe that Trump was using at the time Um, but this is quite a blow to Gilead. I'd be interested to see how their shares perform later on. So after some of the positivity we've had with Pfizer, Moderna, a slight negative here in regards to Gilead Sciences. BioNTech and Moderna could receive though, according to latest reports, EU marketing authorization for their COVID-19 vaccine in the second half of next month, according to the EU's executive ARM. And yeah, the order size is pretty phenomenal for those companies if that does come to fruition. The block is up to 300 million doses on order, which is pretty mind-blowing. Um, let's get into then this chap. This is the kind of outgoing Treasury Secretary Steven Mnuchin, and he's been under pressure from Republicans within the party to kind of wind down some of the Federal Reserve's lending facilities. Possibilities, given what we have seen, which is on paper a recovery of the US economy. Now, that's not strictly true. We obviously know as market participants, because the high-frequency data, which is more accurate for the present context of now, given everything I've just discussed with COVID is getting worse. Activity will slow, and we are inevitably going to see this kind of double dip type impact on the economy. And so herein lies a problem, really. And this has been an evident thing of 2020. Not only is it how would you deal with a virus if there was no politics? You know, would you rely on the science and what decisions then might have been taken by governments? But now political agendas kind of cloud the judgment, I think, to a certain degree. And this can have severe repercussions then for how financial markets might respond. Respond, because political parties servicing that agenda are using then the types of narrative like the GDP number that we had, for instance, that saw a record-breaking bounce as legitimacy to take certain actions when we know that that's not strictly true because things are actually getting worse right now and are set to get a lot worse going forward over the kind of November-December data set. So basically what's happened here is that the Treasury Secretary, this chap, Steve Mnuchin, has made a request for the Fed to return unused Coronavirus Aid, Relief, and Economic Security Act funds, and also to shelve several programs from the Fed that utilized those funds. The move then, the political kind of strategy here, is that it would allow Congress to reappropriate approximately $450+ out of what's been kind of put aside for these various different programs, chiefly under the umbrella of the Fed, and pivot that back in to then get the ball rolling back with negotiations on Capitol Hill about fiscal stimulus. Because ultimately, that $450+ billion, you're not actually asking for new money, so to speak. It's just being rotated from one place to another. And so that, that's the, the logic. The facilities then that Mr. Mnuchin is looking to end, and I've got a graphic here because there are many different emergency measures that have been deployed by the Federal Reserve beyond that of just the kind of promise of unlimited QE and obviously zero-bound kind of rates. There's two schemes set up to purchase corporate debt. So I just move this out of the way. So there was two schemes set up to purchase corporate debt, five facilities created to lend to medium-sized businesses, collectively known as the Main Street Lending Program, and one program led to lend to state and local governments, and another to support asset-backed securities. So they're all of the ones of which Mnuchin has asked the Fed basically to halt in order to then pivot that cash flow to, to to another part of the government. The Fed have come out and considering the type of words that were used, they said they preferred the full suite of emergency facilities established during the pandemic continue to serve the important role as a backstop for our still strained and vulnerable economy. But look, reading between the lines here, that's the Fed saying back off. This is a bad decision and this should not happen. You have to understand that a central bank is never going to be as vocal and explicit as someone like Donald Trump or a member of his administration because they're not in that game. But that was pretty forceful from the Fed, and I think rightly so, protecting what has created and fostered a high degree of stability because if you remember what it was like in markets back in March, you know, it was a very precarious situation. And so yeah, hereon lies then a bit of a problem, because for me, I think that this move— I can see why it might make sense from a political Republican point of view, particularly for Trump outgoing really got not too much to lose here. And if it makes life more difficult for Biden, then so be it. But from a market's point of view, I actually think this is quite a big deal because markets function in a fairly behavioral way. And as you can see here, looking at all of these programs put together, the Treasury backstop and the program limit, the usage of which all of these different facilities have been used is marginal. It's not a great deal. So on one side, that makes sense to, to end it and use that money that could have more immediate effect elsewhere. The problem you have is the whole reason the market stabilized and has recovered— Wall Street, not Main Street— in the way that it has is because of the nature of the bazooka-type response that the Federal Reserve have done. And if you start then taking the punchbowl away when we're just going into an episode of an economic new downturn, given the fact of what we've been discussing with the restrictions coming in in the most economically important areas and also nationwide, as COVID is not going to show any signs of holding up anymore. With the added risk of Thanksgiving coming in just to give it another, um, period of acceleration. I think this is the worst possible thing that you could do right now. And I think for political leveraging for stimulus talks, I think they're playing a risky game here. Uh, and although you can see some of them have hardly been used at all, that is not the point. Uh, it goes all the way back you know, through my time in markets, very reminiscent of the European sovereign crisis when the ECB at the time created different types of facilities that never got used. But the point was that the fact that they existed and they could be used was enough to pivot the market back into a state of confidence and then stabilize the market and see the recovery ensue. So this to me is, is a little bit worrying if this starts to get a little bit more developed as a story. And certainly if it did come to fruition, I think the markets are not going to like it. If it doesn't like it, I think that they— that doesn't see a flight to quality bid in the dollar. I actually think the opposite, because I think equities will fall and that might put the dollar under pressure because economically this is the worst time possible. And then ultimately this is going to have to have the Fed step in at some point and just do more, um, at that point. So yeah, definitely one to watch, particularly as I say, given the fact that we're at a very important strategic technical level now in the dollar index. And if the dollar breaks down, um, that could be very meaningful for the FX market and the broader sentiment for the overall market cross-asset. All right, quick look at the, the calendar for today. We've already had the retail sales out of the UK, and quite frankly, I'm not even going to tell you the number because it's insignificant. It does not matter. This is backward-looking, it's pre-latest level of restrictions in the UK. It really is of little importance right now. What is important then is how does this type of thing fare when we go into November and December. You've probably already read some of the headlines from overnight. Consumer confidence is very low, company confidence is incredibly low. I think I read that only one, uh, what, one in three companies in the UK that were surveyed don't believe that they're even going to survive once the economy reopens. So this isn't really so much about data that's looking at this time frame is about more, again, relying on, on high-frequency data points and then thinking about the future. Now don't forget as well that at any point in time, fully expecting the UK to kick the can down the road with the current restrictions, which are due to expire on the 2nd of December, most likely up until Christmas Eve to allow that loosening of restrictions over the Christmas period. And again, scientifically, should they do that? Well, of course not, but the government is very mindful of appeasing public opinion. And so at the risk then of further negative developments on the COVID side, this is a strategy they're looking to do, is to suppress the case down low enough that they can then have that opportunity to give people a normal regular Christmas experience. Otherwise, speakers— Lagarde speaks again. Really hard to see that she's going to say anything that important. She's speaking at Frankfurt European Banking Congress, and she's spoken multiple times throughout the week, so not anticipating anything new. You've got Fed's Kaplan, Barker, George— the only one of a voter being Kaplan— speaking at an energy conference at 1:30 this afternoon. But look, that is it. So just as a reminder, I will do my regular kind of summary of the news and a look at the major themes the week ahead. I will tweet that on a Sunday. I'm going to be in Amplify Live throughout the day today, so I'll see you guys on there. And yeah, wish you a great weekend ahead. All right guys, take care.