It seems Fed Powell took the inspiration for his FOMC press conference from the character Dory in Finding Nemo, as the mantra "just keep inflating, just keep inflating, inflating, inflating" kept chiming in his head when faced with questions following the 180 reversal of the Fed's policy. Fed Powell yesterday seemed like an imposter: not articulate and standing firm, but umm'ing and ahh'ing his way through the confused questions from the press. What caused "super" Powell, one who was known to have a firm handle on markets and Fed normalization policy standing up to the U.S. administration, to behave more like a child who was finally given permission to come out of the naughty corner to apologize for his actions?
The December plunge in stock markets seemed to have scared not only hedge fund managers but also Fed officials. Perhaps that was their breaking point -- the S&P 500 down to 2400, or the 8% collapse within a few weeks. Regardless, the market found their "breaking point" for the Fed put to be enacted once again.
Last summer, I posited that Trade Wars initiated by Trump were just a smoke screen to "convince" the Fed to stop raising rates and keep boosting asset prices further. But how could the Fed justify this when the U.S. economy was growing at a solid 3.5% GDP, unemployment was at all-time lows and equity markets at all-time highs? Single-handedly causing a recession to occur in asset markets by weaponizing the dollar and hitting the economy where it hurts (Chinese imports/exports). President Trump finally got his way. Given that he benchmarks the success of his candidacy to the net performance of the stock market, it was his main campaign strategy.
As the year started, the Fed had plenty of evidence (justification, rather) to "hold off" on gradual rate hikes, as the data pointed to evidence of a global slowdown, potentially even a recession. Market expectations moved from a 50 basis point hike in 2019 down to a 25 basis points cut in a matter of a few weeks, taking the dollar down, gold up, and stocks higher.
Truth be told, the Fed does not know what to do. They have not said what they will do other than say "they are patient." Rate increases are off the table for now, balance sheet normalization is on hold, and potentially the groundwork is laid for the next round of quantitative easing, QE4. It is clear how irresponsible this would be in the longer term, as it will only lead to an even bigger debt bubble. But let's leave that to the next Fed and administration to worry about, shall we?
The dollar's fate seems to be sealed, for now. Despite the slowdown seen in the U.S., as well as rest of the G7 or G10 countries, the supporting factor for the dollar had been the central bank raising rates. Real rates were moving higher, making a case to be long the dollar vs. other currencies. This has changed now. The dollar will start to trade lower vs. the likes of euro (barring any further deterioration in EU banks/reforms of course), Aussie dollar, etc. and up vs. the Japanese yen. All risk-on trades.
From a pure commercial point of view, and ignoring the academic and philosophical ones -- the perils of being a trader -- this move presents a buy case for emerging markets and commodities. One cannot paint the entire sector with the same brush, as there are some countries within EM and some commodities that suffer from a secular state of slowdown and oversupply, respectively. Copper is one commodity that is still in a state of deficit to a balanced market. It has managed to stay flat despite the market woes of the last few months, purely because its physical market fundamentals are extremely tight. Now that the macro headwind is partially removed, it will have the room to gravitate towards its natural path -- i.e. higher.
We await the result of U.S./China two-day high-level trade talks today. As long as there is mild progress -- even if not an actual resolution, but a firm promise to work together -- that is all the market will need to break higher from here. Following the rally from December lows, we were at the crucial cusp of either shooting higher or re-testing the lows. After last night's declaration of the Fed put firmly in place, shorts will panic here as the market threatens its key resistance levels, computer trading algos will chase the momentum higher, forcing the investors to feel FOMO (fear of missing out) and start buying back in.