Powell’s testimony is the most powerful force driving the stock market down

Outlook: We get new homes sales for Aug but as usual, the big story will be jobless claims, which may well be jiggered by seasonal adjustment. In the absence of a fresh fiscal bill, the sensible response to the information today is to shrug it off, because if cases are […]


We get new homes sales for Aug but as usual, the big story will be jobless claims, which may well be jiggered by seasonal adjustment. In the absence of a fresh fiscal bill, the sensible response to the information today is to shrug it off, because if cases are rising and Congress doesn’t act, claims have only one direction to go—up.

We think Powell’s testimony to Congress is the most powerful force driving the stock market down, buttressed by similar comments from other Feds. The message is the same as the UK Chancellor Sunak’s message—every effort must be made to keep employment as high as possible under the circumstances. This is not an effort to be humane but to save an economy that is driven by the consumer. In fact, it’s common sense. Again we have to note that the far-right “conservatives” who fear too big a deficit are not conserving the economy.

With the UK contemplating additional new actions and some rumbling along those same lines from the ECB, not to mention Trudeau opening a new box of measures in Canada and the new Japanese PM perhaps about to spring a surprise or two, the US is the lone holdout.

A rise in cases that is leading to a stall-speed economy combined with Congress’ failure to act are the opposite side of the same coin. If this is what drove the stock market down yesterday, we have two outcomes: first, risk aversion arises from a political source and thus aversion to politics in the financial world may be ending.

Example: Goldman Sachs said, according to Bloomberg, “A Democratic sweep in November would be the biggest jolt to U.S. yields. A clear victory by Joe Biden, along with a party sweep of the U.S. House and Senate, would boost the 10-year Treasury yield by a total of 30 to 40 basis points over the subsequent month, according to Goldman Sachs. The rise in the benchmark yield would largely reflect the possibility of sustained higher spending. Goldman also views that as the most likely scenario, based on current polling.”

Yeah, and so what? The real return will still be negative. We like to dwell in the far gloomy tail of the normal distribution curve, but we are not blinded to the opposite tail—a world in which fresh spending is paid for by intelligent tax increases. Many hold the view that all tax increases are bad, because they inhibit and suppress the entrepreneurial spirit (and get evaded through loopholes), but that is not necessarily so.

The other outcome from the politically driven stock market drop is restoration of the FX model in which the dollar benefits from a rise in risk aversion. If we unpack this a bit more, a few goblins leap out. First, Trump will want to blame the Fed rather than Congress for the stock market falling and the dollar rising. This could be the occasion he grabs to fire Powell. Or he may initiate a new attack on China, pretending it’s still about trade.

The point is Trump is not about to let the stock be in free-fall and the dollar vastly stronger as he goes into the election. He will take some action and it will be disruptive and ugly. From a dollar long point of view, this is all to the good. But be careful what you wish for. An unstable political environment can generate mindless volatility instead of steady gains.

So far Trump is making it worse: the NYT headline is a bit misleading: “Trump Refuses to Commit to a Peaceful Post-Election Transfer of Power.” Eeek. But maybe not. About miil-in ballots, “We’re going to have to see what happens. You know that I’ve been complaining very strongly about the ballots, and the ballots are a disaster…. Get rid of the ballots and you’ll have a very peaceful — there won’t be a transfer, frankly. There will be a continuation.”

What is he talking about? What gets transferred and what gets continued? We see nothing but incoherence. The NYT generously says “That was an apparent reference to mail-in ballots, which for months he has railed against, without evidence, as rife with fraud and likely to produce a delayed, tainted or outright illegitimate election result.” In other words, he could seek to have all mail-in ballots invalidated (no transfer) and only the direct in-person voting count (continuation of the old in-person variety of voting). Polls indicate Republicans vote in-person more than Dems (who are suppressed) and Dems vote more by mail, so he is simply trying to rig the election. Mail-in ballots have been court-validated for a long time so it’s a hopeless effort, but the guy is desperate.

We expect a breakout to last 3-5 days, then retrace a bit, and then either continue at a lesser pace or fall into a sideways range. It may seem this breakout is different, but in practice, it’s never different. As long as the consensus is growing that the US economy will struggle and get worse, that the stock market is at extreme risk of a major correction, and that Trump is a true threat to the country—the dollar rally can not only continue, but ferociously, not at the usual lesser pace. If you want to get scared, see the weekly chart. Fib retracements are superstitious hooey, but so many people believe in it that they often do come about. In this instance, the euro retraced a little more than 62% and is falling back. Nobody trades a weekly chart, but still.


Tidbits: Sometimes it pays to watch TV. Yesterday far-right Rand Paul got eviscerated on proper pandemic protocols by CDC infectious disease expert Fauci. Paul is a medical doctor and should know better.

Elsewhere, consider the wonderful canine. The NYTimes has this story: “Finland has trained some very good dogs. The country today began offering coronavirus tests for passengers at Helsinki’s airport, conducted by canine specialists that have been trained to sniff out SARS-CoV-2.

“Travelers who take the voluntary test are asked to rub their necks with a wipe to collect sweat samples, and then leave the wipe in a box. A dog trainer puts the box behind a wall, along with cans that contain different scents. Researchers say the dogs can detect a coronavirus-infected person in 10 seconds, with a 94 percent success rate.

“Dogs have long been known to detect other illnesses, like cancer and malaria, and researchers say they are easily able to sniff out the coronavirus, even in a person who is asymptomatic. The exact mechanics are not yet known, but experts say the dogs are most likely identifying the presence of excreted virus in human sweat.” Ain’t life grand?

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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