Stick or twist? Markets pin hopes on Fed chair Powell

Jay Powell, chairman of the Federal Reserve, speaks today at the WSJ’s Jobs Summit. We know the Fed’s policy on jobs already; what the market cares about is the central bank’s response to volatility in the bond market. This will be the last time we hear from Powell before the blackout period for Fed speakers ahead of the March 16-17th meeting.  

 

One option is for the Fed to embark on a third edition of Operation Twist, a policy that was last attempted in the wake of the last crisis. Twist simply refers to selling shorter dated government debt whilst simultaneously buying the same amount of longer-dated maturities. It attempts to control the yield curve by flattening it out – or ‘twisting’ it. It has the advantage of allowing the Fed to get a grip on both ends of the curve whilst not expanding its balance sheet. With the Fed committing to keeping short-term rates at zero for at least another couple of years, the effect on short-term rates should be small. Yesterday Philadelphia Federal Reserve president Patrick Harker stressed that rates won’t be rising in 2022, and that yield curve control is a tool in the Fed’s armoury. Lael Brainard hinted two days ago that the Fed is starting to pay attention to bond market volatility.

 

For the Fed it’s time to stick or twist. We know the RBA has started to blink, and ECB policymakers have been talking up how they won’t tolerate higher yields, albeit the messages have been a little mixed of late. The Fed has carried out Twist twice before – once in 1961 to strengthen the dollar, and again in 2011 during the sovereign debt crisis in Europe when rates were already at zero. The question is whether the Fed worries about the market stresses we are seeing, or whether it thinks the rise in yields is more about good economic news. The problem it has and has had for many years is that we are in world hooked on ultra-low rates so any move up reveals skeletons. 

 

Tech stocks are leading broader markets lower as a sell-off in government bonds picked up again. The yield on the 10-year US Treasury note rose to nearly 1.5% again and seems destined to nudge its way higher. US 5-year break even inflation expectations have risen to 250 bps, the highest since mid-2008. Yesterday the Nasdaq 100 cracked its 50-day moving average to close at 12,683, its weakest since the start of January. It’s now down for 2021 and is about 10% off its recent all-time high. The S&P 500 closed on a key trendline support at its 50-day SMA. It looks like it could be the moment for a crack – Powell could be make or break today. Tesla shares are down over 25% from their peaks. Cathie Wood’s main fund, the ARKK ETF, has shed 20% from its February high as the likes of Square, Zillow and Pinterest all tumbled in the region of 8%. Rocket Companies, which had become the next meme stock darling, fell out of orbit and crashed over 32% to $28.

 

After a decent day on Wednesday, European bourses took the cue from the decline on Wall Street that preceded a soft session in Asia as shares in Tokyo and Hong Kong both fell over 2%.  The FTSE 100 declined around three-quarters of a percent in the first hour of trade

 

Deliveroo has confirmed it will list in London and retain a dual class share structure. The timing is noteworthy since it comes a day after the Hill review. Deliveroo won’t be eligible for a premium listing – and the inclusion on FTSE indices that goes with it – but it soon will be.  

 

The review, which the chancellor endorsed in the Budget, calls for companies with dual class share structures to be able list in the premium listing segment, with some caveats to help protect investors, e.g. the dual class structure would be permitted for a maximum of 5 years and voting rights would be capped at a ratio of 20:1. It will also see the free float requirement lowered to 15% of available shares from the current 25%, and it will create a much easier regime for SPACs – blank cheque companies that are created with the aim of acquiring another business. Now the SPAC craze in the US may not be something we really want to emulate.  As Hill states, “listing on the premium listing segment of the FCA’s Official List has historically been globally recognised as a mark of quality for companies”, which begs the question of the merits of ‘watering down’ ‘the rules.

 

But the principle of evolving the listings rules for today’s markets, today’s technology, today’s investors, and the reality of Brexit, do make sense. For example, Hill notes that “it would be helpful if the FCA was also charged with the duty of taking expressly into account the UK’s overall attractiveness as a place to do business”, as happens in other countries. It also makes recommendations to consider how technology can be used to improve retail investor involvement in corporate actions. These would clearly be positives.

 

Tech firms may be attracted to London as a result of the changes. Between 2015 and 2020, London accounted for only 5% of IPOs globally, in large down to the appeal of Asia and New York for tech firms. But equally it’s about the depth of the market and multiples – are we really able to raise the kind of investment into tech start-ups from London that US bankers can achieve for Silicon Valley?  

 

Elsewhere, OPEC failed to reach agreement yesterday and reconvene today. Chatter of OPEC and allies rolling over cuts has helped support prices after touching the weakest since mid Feb. Crude oil inventories rose by over 21m barrels, the most in nearly 40 years as the weather in southern US has shut in refineries. The build came amid a 13.6m draw in gasoline stocks, which was the largest since 1990. and a 9.7m draw in distillate stocks. 

 

Finally, some good news: JD Wetherspoon will open 394 pubs on April 12th for outside service in gardens and terraces. Opening hours are 9am-9pm. I expect demand will be high. Shares nudged higher after a solid gain following yesterday’s Budget announcement, which provided more business relief and support for hospitality.