- Yield curve control ahead?
- Cable hits 3-month highs
- Nikkei 0.15% Dax 0.13%
- US 10-Year 0.80
- Oil $38/bbl
- Gold $1719/oz
- BTC/USD $9748
North America Open
Markets lost their oomph in early European trade, with S&P 500 futures surrendering the gains in Asia, as traders await the FOMC decision at 18:00 GMT today.
Index futures turned negative into the European morning, as profit-taking and risk-off flow dominated. After a massive run-up in equities that included all-time highs for the NASDAQ yesterday, the markets appear to be in a more cautious mood as they await Mr. Powell and company.
As we noted earlier this week, the risk-rally ramp into Fed Day may be followed by a sell-off if the market does not see any additional stimulus efforts from US monetary officials. Every market player is specifically focused on the possibility of Fed enacting yield-curve control.
Yield-curve control would be a natural move for those policymakers that are averse to moving to negative rates, but at the same time, need a mechanism to keep US interest rates as low as possible to maintain the massive deficit-spending that is taking place at this time.
The key question is whether the Fed will commit to such action at this meeting, or perhaps take a wait-and-see approach for a few months. Any non-action by the Fed will be viewed as an effective tightening of monetary policy and could send stocks plunging in a profit-taking stampede after the huge gains over the past few weeks.
But Mr. Powell is very likely to be circumspect and will most certainly assure the markets that the Fed remains in an ultra-accommodative mode and stands ready to provide liquidity when necessary.
In FX, the majors are already anticipating a dovish message with cable hitting 3-month highs against the buck in late Asian trade while EUR/USD continues to eye the $1.1400 level. If the Fed does surprise the market by making a formal announcement on yield-curve control today, the moves in FX are likely to be the most violent to the upside with the euro barreling through $1.1400 and perhaps even $1.1500 levels, as the US yield-advantage withers away.