- Fed decision the main event today, no policy changes on the menu
- Powell likely to push back on tapering speculation
- Dollar retreats amid market euphoria, ECB unable to sink euro
- Huge day for corporate earnings too: Apple, Facebook, and Tesla
Can Powell be dovish enough?
There is no scope for any policy changes from the Federal Reserve today. This is also one of the smaller meetings without updated economic forecasts, so any market reaction will come down to Chairman Powell’s comments during the press conference.
The Fed has been calling for more government spending for a long time, so Powell will be thrilled with the latest developments in Congress. But he cannot sound too happy. He and other senior Fed officials have recently pushed back on the idea that a brighter economic outlook due to all this stimulus implies a reduction in the QE dosage soon, and he will most likely reaffirm that message.
It is simply too early for the Fed to be discussing a QE withdrawal. If Powell was even to entertain the idea, longer-term borrowing costs would spike higher, the dollar would strengthen, and financial conditions would tighten, which is the last thing you want as a central bank fighting a crisis.
An implicit promise that the Fed will keep its foot firmly on the QE gas would argue for a retreat in the dollar and some upside in equities. That said, any such reactions are likely to be minor as investors know this much already. In fact, the risks here may be asymmetric, because if markets sense that Powell could backtrack on this promise or that other FOMC officials don’t share his views, it could come as a ‘shock’ and spark much bigger reactions in the opposite direction.
Dollar retreats amid stock market euphoria
The European Central Bank fired another salvo at the euro yesterday but was unable to sink the currency. Reports suggest the ECB will study why the dollar is so weak against the euro, despite the American economy being stronger. The euro fell a few points on the news but quickly recovered as the euphoric mood in stock markets spread into the FX sphere, pushing the defensive dollar lower.
The major indices on Wall Street were relatively stable, hovering near their record highs. However, this masks the absolute mania that is taking place under the hood in heavily shorted small cap stocks. Gamestop rose by 92.7% yesterday alone, with its daily trading volume exceeding that of any other stock.
The company has become the poster child of market excess. The stunning price action captures one of the biggest short squeezes in history, a massive fear of missing out, the power of a coordinated retail community, and some outright gambling. While it’s all fun and games while the mania lasts, the risk is that this turns into a game of musical chairs soon as nobody wants to be left holding the bag at the end.
Earnings from tech heavyweights in focus
The economic calendar is relatively light today, but there is a barrage of corporate earnings releases to keep investors entertained. Boeing and AT&T will report before Wall Street’s opening bell, while Apple, Facebook, and Tesla will be in the spotlight after the market close.
Microsoft reported yesterday after the close and knocked it out of the park, propelling the tech heavy Nasdaq to another record. The results from the other tech heavyweights could be equally crucial for the overall market today, given their massive weights in most equity indices. And since the dollar tends to move in the opposite direction of stocks nowadays, the aftershocks could be felt in FX too.
