September 17, 2020

Time Is Ticking For BOE, Stock Futures Trade Lower

Time Is Ticking For BOE, Stock Futures Trade Lower

The U.S. futures are trading lower as investors are digesting the news from one of the biggest events of this week, the Fed’s interest rate decision. The Fed Chairman Powell highlighted uncertainty for the U.S. economy. The Fed cautioned the market last night that the pace of economic activity [KL1] is likely to remain slow. This has made investors adopt a cautionary tone today.

Not Much Surprise

Yes, there is no denying that there was little to no surprise in the Fed statement. But the reason that we are seeing strength in the dollar index is that it is catching a safe-haven play, as two members of the Fed committee weren’t in favour of the current monetary policy. This is really significant because we usually do not see this when it comes to the Fed committee. The likely scenario is that going forward, this is where the market is going to focus for any future Fed meetings; with a dovish camp and a hawkish camp. 

Time To Digest

Markets need some more time to digest the news because the reality is that the Fed’s message wasn’t even close enough to hawkish. We know now that the Fed isn’t going to change the interest rate for at least another 3 years, although there is a possibility that they may keep the interest rate at the current level for 5 years. However, if we have learned anything from previous Q.E.s, the market participants become jittery when the Fed starts scaling back from its asset purchase program. On this front, we don’t have any clear and defined timeline. The Fed didn’t say that they are going to continue to buy more assets for another three years. No, not at all.

The Fed’s asset purchase program is very dependent on the need of the market, and given the fact that the recovery is better than anticipated, it is likely that this asset purchase programme may come to an end sooner than many are expecting. Yes, the economic recovery is currently expected to remain a bit slow, but all of this can change fairly rapidly, especially if a coronavirus vaccine becomes available. So, market participants really need some more time to digest the message more clearly. But for now, U.S. stock futures are disappointed with the Fed, and they are trading lower.

Today’s BoE Meeting Will Be Watched Closely

Over in the U.K., all eyes will be on the Bank of England. It is the BOE’s turn to show its cards and assure the market about its unwavering support. The task that the BOE has on its plate is a lot more arduous than any other central bank. The reason is that the bank has several battles to fight. Firstly due to the impact of coronavirus. Secondly, the U.K. government is withdrawing its furlough support, and it is only a matter of time before the unemployment rate goes through the roof. Consumer spending is likely to become even weaker, and more companies are likely to default faster than the current anticipation.

Canary Wharf, the financial district, has become a ghost town. It is likely to remain that way for some time as there is no interest in commercial space, which means all the residential development around that area will face enormous challenges. 

On top of this, we have a ticking time bomb, aka Brexit. A no-deal Brexit could become a reality, especially with the reckless ways of the government and how it is dealing with the Brexit negotiations with the E.U. This is only creating more uncertainty. Foreign relations aren’t that great as well, as the U.K. has picked its own battle with the second biggest economy of the world, China, after banning 5G technology. This is likely to impact the U.K.’s ability to have a trade deal with China. 

No action is expected from the BOE today. However, traders would like to know how the bank alone is going to fight all these uncertainties, given that there may be not sufficient support from the government. In fact, the government could be creating more obstacles rather than smoothing the course.


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