MARKET DRIVERS FOR APRIL 29, 2020
ASIA AND THE EU
NORTH AMERICA
It's been a subdued night of trade in Asia and during the early European session with currencies in quiet 20 pip ranges while equities were up less than 1% ahead of the Federal Reserve announcement and presser later in the day.
The Fed rate decision is the marquee event in the global markets today and price action is likely to be muted until the Fed provides some guidance. Few market participants anticipate dramatic news, with Chairman Powell expected to reassure the market that the Fed will continue to provide what amounts to unlimited liquidity in the time of global economic turmoil caused by the pandemic.
The Chair is likely to dismiss any notion of the Fed taking rates into negative territory, as such a move is seen as a major stress on the banking system which greatly reduces its chances for profit. One other area that investors will focus on is the idea of yield curve control. So far, the Fed has restrained from such market manipulative measures, but if the Chair does not dismiss it out of hand then fixed income could see yields compress further.
Perhaps the most controversial idea of all would be for the Fed to provide support for equities via exchange traded fund purchases. At the moment such a move would be illegal for the Fed as it is outside its charter, but Fed officials have already stepped around the rules by buying junk bond rated debt through a special purpose vehicle established in conjunction with the US Treasury. So it will be interesting to see if Chairman Powell categorically dismisses such speculation or simply leaves it open-ended by stating that such actions are outside of the Fed’s purview for now.
At this point, with equities sharply higher off their lows, there is little need for Chairman Powell to be overly aggressive in his accommodation rhetoric. Still, it will be the tone rather than any specific policy action that investors will be watching. If Mr. Powell remains unreservedly accommodative, risk assets should remain well bid, but if the Fed Chair suggests that some credit risk default will be a natural outcome of the global lockdown that could spook equity markets badly after a strong rally that they have put in over the past few weeks.
In FX, the market clearly anticipates an uber dovish stance from the Fed as the dollar remains lower across the board and if those suspicions are confirmed we would see EUR/USD take out the 1.0900 figure and USD/JPY tumble below 106.00 as the day proceeds.
