Greg Staples, DWS Group Head of Fixed Income, joins Yahoo Finance’s The First Trade with Alexis Christoforous, Brian Cheung and Brian Sozzi to discuss what investors can expect from the Powell, Mnuchin testimony.
BRIAN SOZZI: Brian, give us three things we all need to be watching out for today.
BRIAN CHEUNG: Well, all three things may have been things we've already heard from the Fed Chairman in the F1C that we had last Wednesday, but Fed Chairman Powell going to Capitol Hill for three times this week. This is the first of three back to back to back days of hearings where he will be urging Congress probably to do more. Something again that we've already heard from the Fed Chairman. Keep in mind that we already got his prepared remarks from the Federal Reserve late afternoon yesterday. In his remarks, that he plans to tell Congress at the start of this hearing in about 13 minutes or so, he'll say that the economy has picked up, but that the path ahead remains, quote, "highly uncertain."
He did also say that the Fed, on its part, has taken action through its near-zero rates, quantitative easing in addition to the 13 liquidity facilities that it's opened up ranging everything from US dollars to risky corporate debt. But he does say that the Fed has powers that only allow it to lend not to offer grants, and he said that could be a problem for borrowers that need more than just a loan that's eventually going to need repayment. He said quote, "In these cases, direct fiscal support may be needed." End quote. Translation-- it might be on Congress to do more.
BRIAN SOZZI: All right, Brian, hang with us here. Let's bring in Greg Staples, Head of Fixed Income at DWS Group. Greg, good to see you this morning.
GREG STAPLES: Good to see you.
BRIAN SOZZI: What do you want to hear from Fed Chief Jerome Powell?
GREG STAPLES: Unfortunately, I think Brian nailed it just right. We're not going to hear anything that's particularly newsworthy. I think he's going to say the Fed's job is pretty much finished. They did a marvelous job in the March, April time period, but they don't have a lot of ammunition left. Now, it's really up to two things. It's up to get control of the COVID virus and how it spreads, and it's up to Congress to come up with the stimulus package. And unfortunately, as far as that last one is concerned, I think given the political environment this week, particularly after the death of Justice Ginsburg and the fight over a potential successor, the chances of that before the election are virtually zero.
ALEXIS CHRISTOFOROUS: Greg, what do you expect for the month of October? As we move closer to the election, do you expect more volatility in this market, and what are you doing with regards to your portfolio?
GREG STAPLES: I would call it a trendless volatility. I think the market does not like uncertainty, and boy, are we to enter a period of uncertainty going for the next four to six weeks. Not just the election, but we're seeing a bit of a flare-up in COVID as well, and probably the run off of some of those jobless benefits and the stimulus that's sort of fading away. So expectations, we see a fair amount of volatility. Probably trendless a little bit of a bearish tilt. We're already starting to see that. Everybody's going to wait until post-November and see what the election brings.
BRIAN SOZZI: Brian, do you think lawmakers will try to rope Jerome Powell into the Supreme Court discussion? He had been all-- obviously, he's made it very clear in the past he doesn't weigh into politics, that's not what the Fed does, but will they trick him some way to get involved in this?
BRIAN CHEUNG: Well, I mean, one way they can certainly phrase that question will be as Greg was talking about it just now, which is that it does seem like this is starting to become a risk that markets at larger pricing in. And if there is movement in markets, there is an argument to be made that the Federal Reserve would be watching that. Now, we've heard it in many different forms before, not just with this Fed Chairman, but with previous Fed Chairs as well, that they're a bit hesitant to want to comment on the day to day movement of markets and whether or not they're pricing in certain types of risk.
But if it does prove to be a short to medium term risk that whether or not, for example, this Supreme Court changed could change the outcome of the election here or that a contested election, for example, could prevent elevated risks over the short to medium term, that could be something that Jerome Powell might be asked to comment on. Keep in mind that he will be testifying in the House Financial Services Committee today. That's a much larger committee than, say the Senate Banking Committee, which means that there will be more questions, and this one could be even a longer hearing, which allows the opportunity for lawmakers to ask maybe more procedurally left field questions like that. So definitely something worth watching. This is his first of, again, three scheduled testimonies this week. So if anything, this could definitely be one where he fields these types of questions.
ALEXIS CHRISTOFOROUS: I'd have to think he'll get a question or two about the election. So Greg, if we do wind up with a disputed election, what will the impact be on different asset classes? I'm thinking particularly the US dollar.
GREG STAPLES: Oh boy, a disputed election, I think the market is already starting to think about, and I guess it depends on the resolution there. Is it two weeks, or is it a month, or does it run into January? I know some hedge funds are already starting to game out. If there's no resolution whatsoever, if we get a tie in the electoral college, what a nightmare that would be.
Listen, I think that that would be obviously very, very bad for risk assets. Under the worst case environment, let's hope we don't go there. Probably negative for the US currency, probably negative for interest rates, but I think that's probably a two standard deviation event right now.