BMA Market Insights: RISK-ON as the Fed Takes Center Stage


Market Snapshot

Overnight, equities in Asia and Europe rose along with U.S. equity futures amid a flurry of deal activity over the weekend and signs of progress toward a COVID-19 virus vaccine. The 10-year U.S. Treasury is mostly unchanged at 0.672% while WTI crude is trading 0.72% lower to $37.06 per barrel.

Pfizer Begins Marketing Potential Vaccine

Boosting investor confidence, the CEO of Pfizer Inc., Albert Bourla, commented over the weekend on CBS’ “Face the Nation”, that critical data from its late-stage trial should be available by the end of October. Should the FDA approve the vaccine, Pfizer is prepared to deploy hundreds of thousands of vaccines to the U.S. by year-end. There are over 18 million healthcare workers in the U.S., who are likely among those that will initially receive the vaccinations. The other two companies in late-stage testing are Moderna and AstraZeneca, who recently resumed testing after pausing for safety reasons.

Risk-ON back in Tech? Tread Carefully

  • TikTok, a popular video-sharing app, rejected a bid by a consortium led by Microsoft to purchase its U.S. technology assets and instead chose Oracle as its ‘trusted technology partner.’ 
    • Oracle would manage TikTok’s U.S. user data, though it is not clear how this would work as backups are maintained in Singapore. 
    • It is also unclear how President Trump will react as the President signed two executive orders last month stating all U.S. citizens and companies are ordered to cease any “transactions” with TikTok by September 20. Additionally, a sale of TikTok’s U.S. operations needs to be completed by November 12.
    • China will likely need to approve the partnership details.
  • Nvidia Corp. has agreed to buy SoftBank Group Corporation’s chip division, Arm Ltd. for $40 billion.
  • Though not technology, in the traditional sense, Gilead Sciences Inc., maker of Remdesivir, will acquire Immunomedics Inc. for about $21 billion.

In other news, Japan’s governing party has elected Yoshihide Suga as its new leader to succeed Prime Minister Shinzo Abe with the final Parliamentary vote on Wednesday. It is widely expected that Suga will continue his predecessor’s ‘Abenomics” policies. The Yen strengthened against the U.S. Dollar to 105.95.

Fed Takes Center Stage

The FOMC will meet on Tuesday, September 15, and Wednesday, September 16 to discuss U.S. monetary policy.  It is widely expected that the committee members will discuss the new average inflation policy framework unveiled by Fed Chairman Powell last month during the Jackson Hole Symposium.

  • The Fed’s new average inflation framework implies that more stimulus measures are on the way, but it isn’t clear if officials will be ready to make wholesale changes at this week’s FOMC meeting.
  • We expect that the post-meeting statement will at a minimum emphasize that rates will not be raised until the 2% inflation target has been achieved “on a sustained basis”, with the updated economic projections likely to indicate that won’t happen until 2024 at the earliest.
  • Should the FOMC decide to hold off on additional stimulus, U.S. Treasuries could sell off and equities take a dive.

Euro Upside

ECB President Christine Lagarde, last Thursday, re-emphasized in her press conference that the ECB does not target the exchange rate. Despite its recent rally, the Euro has further upside potential over the next couple of years.

  • The Euro has gained about 10% against the US dollar, since its lows in mid-March, rising from EUR/USD 1.06 to nearly 1.20 due to the unfreezing of short-term USD funding markets and the unwinding of safe-haven trades into the dollar as risk assets recovered from the Q1 lows. Contributing to the Euro gains was the Fed lowering interest rates to a target range of 0% to 0.25% while the European Central Bank kept funding rates steady at -0.5%.
  • The Euro’s rally over the Summer is in large part thanks to the cohesive steps taken by the ECB and EU governments to shore up the common currency in the face of the coronavirus pandemic, dispelling any doubts about a breakup of the euro-zone.
  • Many of the eurozone’s key trading partners actively seek to keep their exchange rates weak, either through direct intervention or by explicitly targeting the exchange rate in their monetary policy. 

The negative interest rate differential and political uncertainty in the euro-zone will eventually fade as a result of the policy response to the coronavirus pandemic compared to other trade partner countries.  

Weighing heavily on the broader market are:

  • A comprehensive stimulus package in the U.S. is unlikely to be received before October and may potentially be delayed until Q1 2021, leaving the U.S. economy on the fringe.
    • After returning to D.C. last Monday, the Senate, on Thursday, failed to pass a Republican introduced bill to provide financial support to small businesses and workers as well as public health enhancements, education funding, and liability protections for businesses.
  • U.S.-China relations, as both countries fight on everything from trade to defense issues, monetary policy, and the coronavirus. 
    • Secretary of State Michael Pompeo thanked Ambassador to China Terry Branstad for his service, appearing to confirm an earlier statement by President Donald Trump saying that the U.S.’s top diplomat was leaving Beijing.
  • Uncertainty and the prospect of a drawn-out and heavily litigated November presidential election.
  • Second Coronavirus wave.
    • To date, globally, there have been over 29+ million cases and nearly 924k deaths representing a 5% and 8% increase, respectively, over the past 14 days.
    • The latest CDC COVIDView report shows that during the August 1 to August 29 period, weekly COVID19 hospitalization rates declined among all adult age groups. However, while rates for children aged 5-17 were constant during most of this period, they increased at the end of August (likely as a result of increased schools reopenings.) 
    • While there are numerous potential COVID-19 vaccines and therapeutics currently being developed, the limited production capabilities, timing, and acceptance for people to receive the medical solutions are of concern and could be drawn out to the end of 2021.

Up ahead this week:

  • On Tuesday we will receive industrial production and retail sales data from China, the world’s second-largest economy.
  • Wednesday concludes the two-day FOMC monetary policy meeting with a decision on rates and a press conference from Chairman Jerome Powell.
  • Following the Fed, on Thursday, the Bank of Japan and the Bank of England policy decisions are due.
  • Friday sees quadruple witching for U.S. markets when the quarterly expiration of futures and options on indices and single name stocks happens, which can trigger heightened volatility and a surge in trade volumes.