Powell Plays Down Significance of Move to Buy Corporate Bonds

Federal Reserve Chairman Jerome Powell played down the significance of the central bank’s decision to begin buying individual corporate bonds in the secondary market, one day after news of the move helped ignite a rally in bond and stock prices.

Appearing before the Senate Banking Committee to deliver the Fed’s semi-annual report to Congress, Powell said it will not be boosting purchases through its Secondary Market Corporate Credit Facility — an emergency lending program that, to date, has bought only exchange-traded funds.

“We’re not actually increasing the dollar volume of things we’re buying,” he said on Tuesday. “We’re just shifting away from ETFs to this other form of index.” In its announcement on Monday, the Fed said it will follow a diversified market index of U.S. corporate bonds created expressly for the facility in deciding which individual issues to purchase.

Powell defended the Fed’s foray into corporate bonds against accusations it is needlessly intervening in a market that already has dramatically improved from its depths in March.

“I don’t see us as wanting to run through the bond market like an elephant, doing things and snuffing out price signals,” he said. “We just want to be there if things turn bad in the economy.”

The Fed said the index it will use for its purchases “is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility’s minimum rating, maximum maturity and other criteria.”

“This indexing approach will complement the facility’s current purchases of exchange-traded funds,” the central bank added.

Fed’s Goal

Powell’s comments suggest the Fed will use a mix of ETF and individual bond purchases based on the index to achieve its goal of improving the functioning of the market. How much it buys overall will depend on how successful it is in achieving that end, the chairman said.

“If market functioning continues to improve, then we’re happy to slow or even stop the purchases,” he said. “If it goes the other way, we’ll increase.”

The Secondary Market Corporate Credit Facility is among a number of emergency lending programs the Fed has announced since mid-March aimed at limiting damage to the U.S. economy from the coronavirus pandemic. With a capacity of $250 billion, it has so far invested about $5.5 billion in ETFs that purchase corporate bonds.

Former New York Fed official Krishna Guha said Powell’s comment that the volume of dollar purchases won’t be increased could come as a “negative surprise” to financial markets after they were buoyed on Monday by the Fed’s announcement that it will begin buying individual corporate bonds.

‘Modest’ Purchases?

“We had assumed that the initial single-name purchases would be modest but additional to the existing pace of bond ETF purchases,” Guha, who is head of central-bank strategy at Evercore ISI, said in a note to clients.

In a back-and-forth with the Fed chairman at the hearing, Senator Pat Toomey echoed some investors in questioning why the central bank is supporting a market that has improved significantly in recent months.

“It’s not clear to me why the Fed needs to be intervening actively in the corporate bond market right now,” the Pennsylvania Republican said.

Powell agreed it is functionally substantially better and a lot of the improvement came with just announcing the formation of the credit facility.

But he said the Fed believed it should deliver on its pledge to aid in that improvement.

“I wouldn’t say it’s the main reason,” he said. “One reason is, though, we feel we need to follow through and do what we said we were going to do.”

“It was out of an excess of caution to preserve these gains for market function” that the Fed acted, he added.

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08.07.2020 15:14
Forex — Dollar Edges Higher as Virus Cases Grow

The dollar edged higher in early European trade Wednesday, with the safe haven currency in demand as a resurgence of the coronavirus in the United States cast doubt over the strength of the economic rebound.

At 3:050 AM ET (0705 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was up 0.1% at 96.873.

EUR/USD was up 0.2% at 1.1280, while USD/JPY was flat at 107.52.

There are almost 11.8 million COVID-19 cases globally as of July 8, according to Johns Hopkins University data, of which the U.S. has the highest known numbers of cases and deaths in the world.

A number of Federal Reserve officials expressed concern Tuesday that the surge in infections could adversely impact the economy just as some stimulus programmes are set to expire.

Atlanta Federal Reserve Bank President Raphael Bostic warned that the spike in the number of cases has made business owners “nervous again” and that ‘there is a real sense this might go on longer than we have planned for.”

Still, the rise in cases is not simply a matter for America. The AUD/USD pair lost 0.2% to 0.6935, with the Australian dollar weakening after the country’s second-largest city Melbourne re-imposed lockdown measures to curb the outbreak.

Elsewhere, GBP/USD gained 0.2% to 1.2559 after Prime Minister Boris Johnson said that the U.K. remains committed to working hard to find an agreement over trade with the EU. Chancellor of the Exchequer Rishi Sunak is due to announce details of the country’s latest fiscal stimulus package later Wednesday.

Sterling has gained around 0.6% this week against the dollar and 0.4% against the euro, but still remains one of the weakest G7 currencies as doubts still remain as to whether a trade deal will be signed by the end of the year.

Additionally, skepticism exists that a proposal by some of Donald Trump’s advisers to undermine Hong Kong’s currency peg would come to fruition, as such a move would be difficult to implement and risk hurting U.S. interests as much as it would punish China.

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08.07.2020 13:12
Risk aversion sends gold higher, oil downwards

Oil retreats slightly on risk aversion
With one eye on the equity markets overnight, oil markets mirrored the response of currency markets, giving up some of their recent gains and slipping into range trading mode. Brent crude fell slightly by 0.70% to 42.90 a barrel. WTI eased by 0.70% to USD 40.50 a barrel.
Both contracts are unchanged this morning in Asia, with critical resistance on Brent crude at USD 44.00 a barrel, and on WTI at USD 42.00 a barrel. Only a fall below USD 40.00 a barrel for Brent crude, or USD 37.00 a barrel for WTI, would suggest that the rally in oil prices has run its course.
Oil prices continue to remain balanced between Covid-19 induced growth concerns, and recovery expectations in Asia and Europe. Oil’s downside is likely to be limited unless the US situation deteriorates dramatically. OPEC+ discipline is high, and the grouping will no doubt find the willingness to extend the headline cuts if the situation calls for it.

Excitement builds for gold longs as USD 1800.00 approaches
Anticipation is building in the gold fraternity, with Covid-19 concerns giving a haven boost to prices overnight. Gold rose 0.60% to USD 1795.00 an ounce, having tested USD 1797.00 an ounce earlier in the session. Gold’s grind higher is remorseless and pleasingly, appears to have detached itself from negative equity price action for now.
The USD 1800.00 an ounce region will be a tough nut to crack though. It capped gold’s advance multiple times from 2011 to 2012. I do not doubt that there will be substantial option related offers ahead of it to defend USD 1800.00 strikes. Nevertheless, gold is girding itself for the long-awaited assault on this critical resistance level. Gold had support at USD 1775.00 an ounce. Only a daily close below here would delay proceedings. Should USD 1800.00 an ounce give way, gold is likely to move quickly to the USD 1820-1830 zone, driven by stop loss and algorithmic buying.
Gold is unchanged in Asia today in yet another moribund session. It will probably be left to the New York market to get the job done.

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07.07.2020 12:23
Oil prices fall on demand concerns from U.S. coronavirus case surge

Oil prices fell on Tuesday, erasing earlier gains, on concerns that the surge in coronavirus cases in the United States, the world’s biggest oil user, will limit a recovery in fuel demand.

U.S. West Texas Intermediate (WTI) crude (CLc1) futures fell 17 cents, or 0.4%, to $40.46 a barrel at 0340 GMT, after earlier rising to as high as $40.79.

Brent crude (LCOc1) futures declined by 19 cents, or 0.4%, to $42.91, after hitting an intraday high of $43.19.

With 16 U.S. states reporting record increases in new COVID-19 case in the first five days of July, according to a Reuters tally, there is mounting concern that public health measures to limit the virus spread will curb fuel demand.

Florida is re-introducing some limits on economic reopenings to grapple with rising cases. California and Texas, two of the most populous and economically crucial U.S. states, are also reporting high infection rates as a percentage of diagnostic tests conducted over the past week.

«The potential for demand destruction as lockdown re-instatement looks more likely are combining with concerns about OPEC+ discipline to weigh on oil prices,» said CMC Markets’s Chief Market Strategist Michael McCarthy in Sydney in an email.

The Organization of the Petroleum Exporting Countries (OPEC) and other producers including Russia, collectively known as OPEC+, are lowering output by 9.7 million barrels per day (bpd) for a third month in July.

However, those cuts are set to taper to 7.7 million bpd starting next month, adding supply at the same time U.S. fuel demand, especially for gasoline, remains impacted by the COVID-19 outbreak.

«Summer driving demand in the U.S. is low, keeping gasoline demand subdued, and a reintroduction of lockdowns is a major headwind,» ANZ said in a note.

Data from the American Petroleum Institute industry group later on Tuesday and the U.S. Energy Information Administration on Wednesday are expected to show a 100,000 barrel rise in gasoline stockpiles, six analysts polled by Reuters estimated.

The U.S. crude market faces some uncertainties from a court decision on Monday ordering the shutdown of the Dakota Access pipeline, the biggest artery transporting crude oil from North Dakota’s Bakken shale basin to Midwest and Gulf Coast regions, over environmental concerns.

Market sources in the Bakken said the closure of the 570,000-bpd pipeline, while a thorough environmental impact statement is completed, will likely divert some oil flows to transportation by rail.

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