Investors continue to take a bullish view of events. Although not confirmed, Iranian negotiators are expected to travel to Pakistan to engage in peace talks with the US later today or early tomorrow. As is his way, President Trump continues to threaten a binary outcome \u2013 deal or destruction \u2013 after tomorrow’s ceasefire expires. For the time being, the market seems happy to sit pro-risk on the view that the ceasefire will at least be extended. Also buoying equities has been the shift back to the tech story. Positive news came out of Asia overnight with EQT AB raising $16bn, the largest pool ever, for a private equity Asia fund, and semiconductor exports from Korea maintaining heady export growth rates at 50% YoY. <\/p>\n
Amid this pro-risk, soft dollar backdrop, Kevin Warsh appears in front of the Senate at 1600CET today. My colleagues James Knightley and Padhraic Garvey preview that hearing here<\/a>. The consensus view in markets is that Warsh will be dovish on the policy rate and hawkish on the Fed’s balance sheet. The balance sheet discussion could get a bit technical in the form of the choice of reduction (roll-offs or active sales), which securities (Treasuries or Mortgage Backed Securities) and whether the resulting decline in surplus liquidity could trigger another 2019-like crisis in the repo market. Investors expect a steeper curve from all this.<\/p>\n Barring comments on the Fed’s balance sheet that unnerve the long-end of the Treasury and risk assets, Warsh’s comments on the policy rate will probably be a bigger driver of the dollar. With oil prices and short-term inflation expectations high at the moment, comments which see short-dated swap rates and real rates come lower will be dollar negative. We doubt moves will be large, however, because unless the Department of Justice drops its investigation into the Fed’s reconstruction project, Republican Senator Thom Tillis will still prevent the Warsh nomination from proceeding to a full vote in the Senate.<\/p>\n