Markets Chop but Push Higher Hoping for Powell Lollipop

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Risk pressured a bit Europe
FX flat
Nikkei -0.49% Dax -1.21%
UST 10Y 0.67%
Oil $26/bbl
Gold $1701/oz
BTCUSD $8916

Asia and the EU
No Data

North America Open

The currency markets were stationary in Asian and early European trade with major basically tracing out 20 pip ranges for most of the night. The only eco event on the calendar was the RBNZ statement which suggested that New Zealand’s central bank was willing to consider the prospect on negative rates.

Governor Orr had his own “do whatever it takes” moment last night telling banks to be prepared for negative rates by the end of the year as the RBNZ left all options on the table. The kiwi central bank is clearly trying to get ahead of the curve using every policy tool imaginable to mitigate the contraction caused by the coronavirus pandemic. The kiwi dropped by nearly 1% as a result of the highly aggressive monetary stance but investors may be jumping the gun a bit as the RBNZ noted that such policy actions are simply being considered and no decisions have been made so far.

The hyper accommodative posture of the RBNZ sparked speculation that the Fed may follow suit in the same direction. All eyes in the market will turn to Jerome Powell who delivering a virtual speech at 9am New York time. The Chairman is very unlikely to address the issue of negative interest rates directly but if he does not dismiss the issue out of hand the market will take his equivocation as an uber dovish sign.

The Fed is in a very different position than the RBNZ with respect to negative rates, not only because the dollar is a reserve currency but also because the US has a very robust retail money market infrastructure and such a move would wreak havoc with that sector. Still, any non-denial denial will be seen as dollar negative but positive for equities, and as the market approaches New York open equities are better bid.

After yesterday’s late afternoon selloff, the futures look considerably better with Nasdaq up 72 basis points ahead of the open. Like a junkie seeking his daily fix, equities continue to look to the Fed for accommodation and if Mr. Powell complies today the futures are likely to push higher. However, with equity traders clearly anticipating a kind and gentle Chairman any hawkish rhetoric will come as a major surprise and could send futures to session lows in a fit of disappointment.

Boris Schlossberg
Managing Director

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