Powell Put still in play

Summary

If the much discussed (hypothetical) ‘Powell Put’ exists, it looks very much like a bearish dollar trade right now.

Dollar reversal continues

The Federal Reserve chair’s words on Friday connected much more effectively with participants than similar comments in December. Jerome Powell’s stress on patience, flexibility and “sensitivity” above auto pilots and any pre-set paths continues to be a salve for shares and a destabilizing force on the greenback. Consequently, a dollar correction from December’s 18-month top, that accelerated on Friday, continues apace, as challenged currencies like the yuan, sterling, euro and Aussie all notch technical inflection points.

‘Good news’ reaction to bad ISM prints

Indeed, forward guidance has been telegraphed to such an extent that startlingly weak readings from ISM’s widely followed service sector surveys out on Monday have been shrugged off. New Orders was the only key component gauge to rise, inching 0.2 higher to 62.7, its best since June. Whether or not the perception will play out in the long term, it backs the notion that any U.S. economic moderation could be short-lived, and even if it materialises, the Fed now looks far less inclined, than it appeared to be last year, to rub salt in the U.S. economy’s wounds.

Testing events ahead

In context then, earlier softness in European and U.S. stock indices only suggested the return of free-floating anxieties on the surface. In Europe at least, there were a few notable causes. Brokerage downgrades of heavyweight consumer-facing shares, Heineken, AB InBev and Imperial Brands, anchored consumer sectors, helping explain much of the broad loss of tone. On their own though, these influences don’t nullify the basis of Friday’s melt-up. Recall that China’s central bank threw the switch for a hefty 100 basis-point rate cut ahead of Powell’s appearance on Friday. All told, the market’s immediate instinct was to begin unwinding risk averse positioning with one-day rallies that soared past near-term standard deviations. As such, renewed caution should be kept in proportion. True, the jury is still out with regards to whether the balance of investors’ tastes has tipped back to a bias for risk-seeking or the opposite. And appetites will be tested anew this week by risk events like the outcome of second-tier U.S.-China trade talks, a U.S. inflation update, the Washington shutdown, resumed Brexit parliamentary debates and UK GDP. With Wall Street drifting definitively into the green though, investors are expressing a little more conviction that the Fed has their backs.

U.S. stock market snapshot: [07/01/2019 16:26:54]

Source: Refinitiv/City Index