Pre-Market Review
Fed Under Pressure

Posted by James Hughes -
Scope Markets

Markets could see gains as we approach the open in Europe. That’s despite more worrying news and fears of a second wave of infections from the Coronavirus. Many worry that after the easing there will be a second spike in infections leading to stricter lockdown for longer. Officials in South Korea are also reviewing lockdown measures after infections rose. The Fed is under pressure as Trump is calling out for negative rates.

Yesterday saw the number of COVID-19 cases in Germany triple after lockdown measures saw an ease. There is now the possibility that stricter measures to be in place after the R-rate jumped back above 1. This is a fear for many other countries. The UK especially after Boris Johnson announced an easing of measures at the start of the week.

The reason the UK wants to act so quickly is that the economy needs to be back up and running. The GDP data showed that the economy contracted by -5.8% in March and by -2% in Q1. Manufacturing production fell by 9.7%. Both of these numbers were slightly better than expectations with forecasts for monthly GDP at -8%. However, the economy might be on course for the worst recession since the 1930s.

Fed might be looking at negative rates

The rest of Wednesday’s session waits for the Fed’s Chairman Jerome Powell. Many wait on whether the Fed chairman will talk about the prospect of negative interest rates in the US. This could give yet more help to the economy. The Fed has already slashed rates and pledged trillions of dollars in aid to combat the effect of the pandemic.

The expectation that the speech will bring about some key policy decisions not seen before in the US has led to optimism from investors. However, Powell might resist the calls for negative rates. This is despite the very real prospect of deflation, and ongoing pressure from US President Donald Trump. Worryingly in the past, the Fed has caved to pressure from Trump on monetary policy despite supposedly being an independent body.

Oil prices remained solid as we continued to push towards the end of the June trading contract. Last months move into negative prices has many worried we could see a similar picture once we get to the expiry of the June contracts next week. Demand is yet to pick up scientifically enough. However, moves by OPEC to extend output cuts away from the agreement could have an effect.

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