Market Overview

20 May 2020

Post-Testimony Tiqui-Taca Before FOMC Minutes

Markets continue to be mostly sideways since Tuesday evening, excluding climbing Gold futures, as they are awaiting the Federal Open Market Committee's (FOMC) April 28-29 policy meeting minutes at 18:00 GMT. It is unlikely that market participants really hope for some fresh shedding of light signals encoded inside the multi-page rhetoric of the American monetary regulator. Investors rather seek the proper assessment of the investment community's final reaction to the entire chain of recent statements made by different Federal Reserve (Fed) officials on the prospects of stimulative financial measures in full spectrum.

In a testimony before the US Senate Banking Committee yesterday, the Fed's chairman Jerome Powell said the Fed was looking at extending access to the credit facilities to additional borrowers, including states with small populations. Otherwise, he defended the steps already taken before the lawmakers and did not say anything particular new in addition to the unprecedented monetary support for the economy that the audience would not have known before. Mr Powell remarked he expects a $600 billion Main Street Lending Program and remaining initiatives should keep running until the end of May. "People are working literally around the clock and have been for weeks" to get the credit pools up and running, the Fed chair added.

The Main Street Lending Program is going to lend to midsize companies with fewer than 15,000 employees or less than $5 billion in annual revenue. Primary Market Corporate Credit Facility deals with purchasing corporate bonds from investment-grade companies and those that fell into junk status after the March collapse. The Municipal Liquidity Facility is buying debt from the investment-grade state and local governments as Term Asset-Backed Securities Loan Facility is working with credit-backed securities including auto loans, student loans, and small-business loans. The monetary committee most recently launched its Secondary Market Corporate Credit Facility to purchase corporate-debt exchange-traded funds (ETF). The facility took in $305 billion worth of ETFs in its first day of operation, Mr Powell said. The Fed's chairman paid sufficient attention to all these programs since these are the moments that probably interested Congress members more than abstract monetary matters.

As for the issue of the theoretical possibility of negative interest rates, Minneapolis Fed's Neel Kashkari expressed himself most clearly, if of course it is possible to speak at all in this case about any clarity of words of Fed's officials. He stressed that the United States has "an extraordinary fiscal capacity to borrow and spend as needed" to get through coronavirus crisis, so "now is not the time to be cautious in spending", but "Fed has other tools it can use before negative rates". It doesn't get any more straightforward than that, but only at first glance. Because at a second glance, someone might think that having tried all the means the Fed could still get to negative rates. So this kind of doubt may remain for a long time in the market, although it will fade into the background.

In a recent conversation with Face the Nation - CBS news show - moderator Margaret Brennan, Mr Kashkari also voiced: "I think a V-shape recovery is off the table…There's some of the temporary furloughs are becoming permanent job losses. And as you see, small businesses, even here in Minneapolis, we've seen restaurants who have already announced we're not reopening. That it's just too hard. We're just going to close up. That's what makes it a much longer, harder recovery". Moving to a more practical level that everyone can understand, he added: "The notion of reopening the economy, it's up to all of us. It's actually not up to the elected leaders when we reopen. It's up to all of us when we feel safe... sending my daughter back to daycare or taking my family out to a restaurant or back to a movie theatre. Ultimately, until we have confidence that the medical professionals and the medical infrastructure really has its arm around the virus with a vaccine or with massive widespread testing or an effective therapy, it's hard for me to see going back to normal as we knew it…"

As for financial markets and, in particular, stock indexes and individual stocks, they are quite clearly far ahead of the economy. Most investors bought future expectations, when the prices were not so far away from the bottom, and so far they continue to do so at much higher prices. But that means there is only a secondary question for the economy, but it is the main one for the markets: how far the optimist bulls are ready to go in advance purchases?

On Tuesday, US Treasury Secretary Steven Mnuchin also defended his fiscal response to pandemic before the Congress, and he told senators he was willing to consider extending and modifying a payroll loan program for small businesses. Nearly $3 trillion in federal rescue programs rolled out over the past two months designed to support the economy.

Mnuchin warned that prolonged lockdowns would pose a "risk of permanent damage" to the economy. "How many workers should give their lives to increase the GDP [gross domestic products] or the Dow Jones by 1,000 points?" Senator Sherrod Brown, the committee's top Democrat, asked Mnuchin. "No workers should give their lives to do that, senator, and I think your characterization is unfair. We have provided enormous amounts of equipment," Mnuchin replied. And he wanted to thank "all the essential workers", but Mr Brown interrupted him by adding, "Thanking is great, but is it fair our economy pays the essential workers so little in such work conditions?" The Democratic wing of Congress is exploiting the theme of leaving low-wage workers without adequate protection from the virus to consider legislation freeing up trillions of Dollars in additional aid, but Republicans and US President Donald Trump are resisting while supporting other channels for allocating aid through companies.

Initial recipients of the $660 billion Paycheck Protection Program, which provides "forgivable" loans to small businesses, are nearing to the end of their eight-week loan terms, and calls by senators for extensions increased during Tuesday's hearing, Reuters reported. "Companies are really having issues with not necessarily being able to use it within those 8 weeks. They don't want more money, they want flexibility that they can use it in longer than an 8-week period," Mnuchin said, as he hopes to reach a bipartisan agreement "technical fix" to extend the loans. Senator Elizabeth Warren, a Democrat, pressed Mnuchin on why there are no specific requirements to retain employees for participants in the "half-a-trillion-dollar slush fund" supporting the "Main Street" lending program and Fed credit facilities aimed at larger borrowers.

All these are examples of fierce battles over aid packages in the US, but it's fair to admit that huge amounts of aid end up in the economy very quickly, so this is much more of a problem in Europe than on the other side of the ocean. After yesterday's meeting of EU Finance Ministers, some countries including Austria, the Netherlands, Denmark and Sweden are going to present an alternative plan to support the economy, which means that internal financial disagreements could continue within the EU. This is a rival plan to fund economic recovery challenged to the proposal set out by Germany and France, and it is expected to be published after 3 p.m. Brussels time on Wednesday, according to Bloomberg that cited two European officials familiar with the plan.

Germany and France have a proposal to allow the EU's executive arm to issue 500 billion Euros of bonds, with the proceeds going to help the recovery period in the countries affected most by the pandemic. The recipients will not need to pay this money back, so the securities could be financed collectively. However, it would mean that the richest countries including the plan's four critics would be bankrolling poorer ones. But the four countries are ready to help most affected EU members with loans that should be paid back later. The so-called Visegrad Four, including Poland, Slovakia, the Chezh Republic and Hungary, also has many questions about the proposal, Chezh Prime Minister Andrej Babis said. And Polish Minister Mateusz Morawiecki said the proposal is a move in the right direction but more negotiations are needed on how the funds would be divided among the countries, so the Eastern countries are probably pretending they will take on a larger share of the irrevocable money.

All this process of distributing aid on both sides of the ocean still supports the moderate optimism of the markets, and yet faster processes in the United States leave the advantage open for American stock indexes in these conditions. European indexes are lagging behind but may catch up later. Partly, the motivation to buy up more US Treasuries is reduced because of this, which may upset Mr Mnuchin. But at the same time it limits the possible strengthening of the US Dollar, which helps the US foreign trade balance. The Euro zone's current account surplus narrowed to 27 billion Euros in March from 38 billion Euros in February, though the trade surplus increased, the European Central Bank said on Wednesday. But the future situation with the trade balance may not develop in favour of Europe if the Euro rises in price. "The [potential] Franco-German agreement is big news. This has made it difficult for speculators to close their short positions on the [euro] currency," said Kyosuke Suzuki, director of forex at Societe Generale.

The market maybe still doomed for some time to stomach the set of different ideas in order to realise what to do better in the next decisive steps. And while waiting for its majority's reaction to their own self-analysis reflection, the market makes more sideways or wait-and-see movements in a Tiqui-taca style. As football fans are well aware, Tiqui-taca is a style of play in football, especially practised perfectly in Barcelona, and characterised by short passing and limited movement of players working the ball through various channels and maintaining possession. In its ideal form, that is a quick one-touch football, involving virtuosic small-distanced passes, following then by explosive and unexpected bright final study of the attack with a brilliant "what a goal!" at the end of the combination.

So, the present lacelike market patterns on the charts are more convenient for the fans of that ultra-short term virtuosic trading style but not good for the lovers of large breakthrough market moves that form a clear and fast-developing "attack" tendencies. Perhaps they would also have a reason to shout "what a goal!" and to make online "hugs" with their colleagues while keeping the prescribed social distance. But this may happen a little later, at the end of a boring market consolidation.


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