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Even FED Chair Powell Gets Ignored. What Will it Take for the Market to Take Its Medicine?

Bob Mason

It wasn’t long ago that FED Chair Powell had the greatest influence on risk sentiment and the global financial markets.

The President of the FED, who manages and supports the world’s largest economy, should certainly have such influence.

For that very reason, persons elected to run the central bank have certain capabilities, one of which is to deflect.

Since becoming the FED Chair, U.S President Trump has been the monkey on his back. Demanding just about everything. The demands became even more demanding as time has passed.

We have seen Trump shift from calling for zero rates to almost begging for negative rates. When considering debt levels, it isn’t surprising…

For some reason, however, the markets have largely ignored FED Chair Powell’s darker comments.

After all, we are currently in a “head in the sand” phase of the economic meltdown cycle.

Analysts, economists, and even a number of heads of states are attempting to pull the wool over the eyes of voters and more…

Economic Outlook

We have yet to hear a single central banker talk of economic recovery so significant that growth would return within the current year.

Central bankers have certainly not been shy to talk down the economic doom and gloom.

There is a very good reason for this. Quite simply, central bankers cannot be blamed for the economic meltdown. Even more significantly, they can’t be blamed for the fallout once the spread of the virus abates.

Most central banks have delivered more than could have been ever anticipated in such an economic environment.

Despite the steps taken and government fiscal policy, however, the doom and gloom over what lies ahead lingers.

Powell’s comments from Sunday and testimony on Tuesday certainly support the more realistic outlook.

The global economy is not about to recovery anytime soon and managing consumer and market expectation is key.

Powell talked of a recovery by the end of 2021. Other economies may struggle to meet such a timeline, despite easing lockdown measures sooner than the U.S.

The one curveball that manufacturing economies face is the outcome of the latest U.S – China war of words.

This was not the time for Trump to attempt to recover some lost support. An attack on Huawei is a broken record, as is an attack on China.

And let’s face it, there is only the U.S government to blame for the spread of the pandemic across the nation.

TEFLON

Across the riskier assets, we have seen May deliver quite a choppy period.

The only winner has been crude but even that is hardly convincing when considering the fact that WTI and Brent are both down by 47% year-to-date.

In spite of the peaks and troughs in the global equity markets of late, these are also in the deep red year-to-date.

Yet, the losses are not even close to the magnitudes you would expect amidst the economic meltdown.

Hanging by a Thread

For those believing that the latest pullback in risk appetite is yet another brief visit into the red, there are a number of risk drivers to consider.

A significant one is the daily COVID-19 update.

The U.S and the EU have been easing lockdown measures over the last week, some a little longer.

From an incubation period perspective, there’s a 2-3 week period during which the infected are asymptomatic.

This means that the markets could be sitting on an imminent market timebomb… In fact, FED Chair Powell was also of the view that COVID-19 numbers need to have the greatest influence near-term.

While numbers from the U.S have been on a downward trend, numbers from the worst affected in the EU have been impressive.

France, Germany, Italy, and Spain reported sub-1,000 numbers on Monday and Tuesday. Numbers from France, Germany, and Italy have been even more impressive.

Italy reported less than 1,000 new cases for a 7th consecutive day, with both France and Germany reporting sub-1,000 for 11 consecutive days.

It’s not going to take much to rock the boat, however. While the tension between the U.S and China is certainly a real threat, a 2nd wave remains an even greater one.

Monitoring the numbers, progress on treatment drugs, and vaccines are certainly important.

Perhaps more importantly, however, will be to track the numbers across geographies in a rush to ease lockdown measures.

Trump has been open about removing containment measures at all costs. There are undoubtedly others taking a similar approach…

Can governments and central banks continue to overshadow the harsh realities of the global economic outlook?

Perhaps this week’s prelim private sector PMIs for May will give the markets a reality check.

Either way, it continues to be hard to bet against the Greenback that remains the “go-to-guy”…

At the time of writing, the EUR was up by 0.55% to $1.09818. When viewing the Eurozone economy and its reliance on global trade terms, even the EUR looks set for a fall…

This article was originally posted on FX Empire

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