Vol Stimulants Around The Corner Via FOMC & China-US Trade Talks

State Of Affairs In Financial Markets 

Source: investing.com

It was a low key affair in the Forex arena ahead of the Federal Reserve monetary policy meeting, where all the attention will orbit around the Central Bank’s position on its balance sheet. But first things first, as the only currency exhibiting signs of life late on the day on Tuesday, courtesy of the Brexit amendments votes in the UK parliament, was the British Pound.

Today’s debate and votes on Brexit by UK MPs was about finding a more consensual way forward while getting a pulse of the desire by the government to avoid a ‘No-Deal’ Brexit. After all said and done, it very much played out as one would have expected, with amendments related to creating a safety net that the UK won’t leave the EU without a deal finding enough approval. However, judging by the late sell-off in the Pound, the narrative in today’s GBP playbook was all about getting the maximum guarantee that the UK will avoid a hard Brexit, so the fact that votes by MPs Cooper-Boles on blocking a hard Brexit failed, it’s a testament that any re-emergence of the dreaded word ‘hard Brexit’ as even a remote possibility spooks markets and the Pound, as a result, expressed those fears. Throwing cold water, the EU has reiterated that the withdrawal deal and the Irish backstop won’t be re-negotiated.

Find below a table put together by Morgan Stanley listing the different proposers during Tuesday’s amendment votes alongside a summary of what went for a vote. I also include a timeline.

Source: Morgan Stanley

Let’s now shift gears away from Brexit, as there is a significant number of moving pieces to contend with in the next 24h-48h. On top of everyone’s mind is the FOMC meeting later today. Ever since last week, there have been credible chatting, as the story was reported by the WSJ, that Fed officials may weigh an earlier-than-expected end to its bond portfolio runoff. It’s blatantly obvious that Central Banks, with the Fed very much at the epicenter, have become the ultimate providers of market liquidity to keep disguising the structural and cyclical negatives of an aiding global economy.

That’s why in today’s FOMC, most of the attention will be centered around the narrative towards forwarding tweaks to the quantitative tightening process (QT) and a possible normalization of the Fed’s balance sheet to keep sustaining markets. Fed’s Chairman Jerome Powell and the rest of Central Bankers for this matter, at the end of the day, perform a stability-seeking role, and that’s why the balance sheet and the excess liquidity that it provides to the system is the absolute number 1 topic that the narrative has evolved into.

Central Banks try to convey the idea that their policies must act in line with a mandate of maximal employment and regular inflation, not too high nor too low, but ultimately, if the financial conditions manifest trouble in the economy as seen through the tightening of financial conditions in Q4 2018 as the selling tsunami overwhelmed equity traders, that when you simply must listen to the market and recalibrate your policies in accordance to provide a safety net. That’s where the Fed stance at the moment, suggesting that a lifeline in the form of a re-adjustment in its balance sheet to keep higher levels of liquidity into the system is a real possibility, that narrative will be the fuel for markets to seek the new points of equilibrium on Wednesday.

The art of communication in the domain of Central Banking involves the right precision and calculus in timing your intentions (the ‘when’), properly working out the forms in how you are going to project that message (the ‘how’), the content of the message itself (the ‘what) and whether or not it exists enough evidence to take a certain course of action (the ‘why’).

Ever since Fed’s Powell caved in to the desires of the market (revert its QT) by suggesting the Fed balance sheet shrink is no longer in ‘auto-pilot’, what became known as the Fed Put, the equity market has had a stellar 10+% run-up, which tells me that the pre-conditions for the Fed to flex its muscle by stepping up its rhetoric on backtracking its QT program are still not there.

The governing board at the Fed is surely going to figure out the best course of action should the proverbial hit the fan again, but the aggressive recovery in equities simply makes the ‘when’ and ‘why’ boxes of the semantic game not yet justifiable to be ticked. The Fed is not at a stage in which it needs to convey a message of readiness to end the balance sheet reduction should all the pre-conditions be present. That’s what the Central Bank will aim to achieve by massaging at the best of its abilities the ‘what’ and ‘how’, but the reduction of tail risks in equities gives them some breather on ‘when’ and ‘why’.

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The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth ...

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