Fed’s gospel choir off-key with markets

Federal Reserve calls for additional stimulus

By my count, the Federal Reserve Chairman and five regional presidents formed an impromptu choir overnight. All six were singing from the same song sheet, the fiscal stimulus lament. To financial markets though, the harmony was off-key, and the audience took fright, with stock markets being sold heavily.

Notably, US treasury yields rose modestly as US bonds were also sold, and energy and precious metals were also marked heavily lower. About the only thing that rallied was the US dollar, which notably outperformed against the pro-cyclical Australian, Canadian and New Zealand dollars. Even Bitcoin ended the day lower.

Given the price action across various asset classes, notably the rise in US treasury yields, markets experienced a full risk-off event last night. The significant difference this time versus recent corrections is that is really was sell-everything and move into cash; in this case, US dollar cash. The price action overnight suggests markets are now in a heightened state of alert, with any upside price corrections likely to be rallies to sell into, not dips to buy.

The consistent song sung by the Federal Reserve officials overnight should not be discounted. Although that message has been consistent in recent months, the Federal Reserve has dialled up the volume to eardrum splitting levels. The Fed may have quietly despaired at the bi-partisan logjam in Washington DC, but the death of Supreme Court Judge Ruth Ginsburg may have indirectly forced its hand. The tragic passing of Mrs Ginsburg, and the process of her replacement is threatening to consume the Republicans and Democrats ahead of the US elections, thus taking their eye off the ball regarding the economy.

Whether the Federal Reserve’s fiscal gospel is heard in Washington DC remains to be seen. President Trump this morning, has called on GOP negotiators to “go for higher numbers’ in stimulus talks. Whether this translates into a mature and productive discussion by both sides for once remains uncertain. The FOMO gnomes of Wall Street are already voting with their feet and leaving the building.

The rot had already started earlier in the day in the shape of the pan-European and US PMI data. Manufacturing data across both continents was robust. The services data told another story. It universally disappointed, notably so in both Europe and the UK. As governments in Europe and the UK impose new restrictions to contain a resurgent Covid-19, it appears to be making its presence felt almost immediately in the services PMI’s. Similarly, Covid-19 and the run-off of the previous US fiscal package seems to be eroding the momentum of US consumer discretionary spending.

The healthy dose of reality bites continues to sweep financial markets, and not before time. It is a stark reminder also to the limits of monetary policy, and any government using the old playbook of letting the central bank do the heavy lifting in isolation could find that coming back to bite them at the ballot box amongst other places.

Today in Asia, we are likely again, to be at the tender mercies of short-term directional moves in US equity index futures. I suspect though, Asia will be less inclined to follow this path of least resistance today, than they have over the previous week. The data calendar is bare, with only Singapore Industrial Production at 1300 SGT. A notoriously volatile dataset, it is expected to show a continued recovery. With the domestic economy mired in a deep recession, the data will not be market moving.

Germany’s IFO Business Sentiment and US Initial Jobless Claims round out the day. With markets on edge, a disappointing print by either could spark an outsized negative effect. Otherwise, markets will continue to be dominated by headlines and sentiment, none of which look set to be supportive for markets today. We will probably nseed a US fiscal package breakthrough to turn that sentiment around.

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