Powell Administers Booster Shot to Markets | Daily Market Commentary with Jeffrey Halley
The Federal Reserve did what it needed to, held rates steady and reiterated that any wobbles in growth and bond yields would be met with a wall of Fed money. Importantly, they also reassured markets that they would alleviate any shortages of off-shore US Dollars if necessary.
The latter will be a sigh of relief to emerging markets and green-lighted the recommencing of the US Dollar sell-off. Equities also eagerly devoured Mr Powell’s comments, rising on Wall Street and across Asia today.
The largesse of the Federal Reserve comes in the nick of time. The rampaging virus across Western and Southern United States does threaten to stop the incipient recovery in its tracks. It also comes as the US Government’s next fiscal stimulus package, which should be labelled the pay cut package, makes snails progress. I remain hopeful that something will emerge, however, as November’s elections are uncomfortably close for Republican’s facing an angry electorate.
The data calendar is quiet in Asia today. Singapore bank lending shrunk slightly, with Australian export and import prices falling more than expected. Both data points highlighting that deflation, and not inflation, is the real short-term enemy thanks to the economic hit from the pandemic. Samsung Electronics released an underwhelming Q2 result, profits edged higher but were driven by one-off gains in the display division. They declined to give full-year guidance and reiterated the murky economic picture caused by the pandemic. Samsung’s results are weighing on the Kospi today.
Although there is an avalanche of European Union economic data today, the highlight being German GDP, most attention will be focused on US earnings releases this evening. In particular, the big tech “gang of four,” fresh from a grilling in Congress yesterday, release Q2 results. Alphabet, Apple, Amazon and Facebook are all expected to show hits to the bottom line due to the economic slowdown. The question will be how big those hits will be, and what are their outlooks for the remainder of the year. With such a significant weighting on the S&P 500 and Nasdaq indices, where goes big tech goes the market. A negative surprise could undo the largesse of the Federal Reserve overnight. However, I suspect that any falls will be limited in days, possibly hours, as global monetary policy supports the buy-everything FOMO trade.
US GDP and weekly jobless data hit the wires at 2030 SGT. QoQ GDP is expected to fall by a mindboggling 34.0%. The reasons are self-explanatory and well telegraphed by the GDP now-casts from various Federal Reserve offices around the country. Here is an example. https://www.
Arguably, the weekly jobless data is more important, with markets somewhat anxious that both initial and continuing claims will spike as Covid-19 engulfs the US sunbelt states. Initial Jobless Claims should edge higher by 1.45 million, with Continuing Claims stubbornly remaining above 16 million. The recovery in both numbers has stalled in recent weeks, hinting that the recovery is stalling. Until now, it has entirely ignored by markets, which remain in a state of denial. It highlights the urgency of Republican’s pay cut plan to make rapid progress. Worse than expected data should nudge that process along, as most are voters. The data will be market moving, whichever way it prints, but won’t on its own, be enough to upset the Federal Reserve’s buy everything back-stop.
Asian stock markets are mixed.
Although Wall Street had a very positive session after a dovish FOMC, the picture is somewhat muddier in Asia. Mainland China continues moving in its own mini universe, the Shanghai Composite and CSI 300 both jumping over 2.0% today. They are possibly boosted by Huawei becoming the largest mobile phone producer by sales, although most are confined to the Mainland itself. The Hang Seng has risen 1.0% in sympathy.
Japan’s Nikkei 225 is only 0.15%, capped by ever-increasing Covid-19 cases and new restaurant restrictions in Tokyo. Samsung Electronics’ results are weighing on the Kospi, which has edged just 0.25% higher. In contrast, Australia has shrugged off a worsening Covid-19 situation in the lucky country and taken its cue from Wall Street and the Fed. The ASX 200 has risen 1.0%, with the All Ordinaries increasing 0.90%.
Singapore is lagging after the MAS capped bank dividends yesterday. Banks have continued to be sold heavily today, dragging the Straits Times lower by 1.40%. That has spilt over to Kuala Lumpur, with the FKLCI falling 0.60%.
Despite the game of many halves being played out in Asia today, European stock markets should take their cue from Wall Street overnight and start the session in the green. Key risk points remain big tech’s Q2 earnings and US Jobless Claims.
The US Dollar sell-off resumes.
A dovish FOMC and Fed Chairman were all markets needed to bring back the great US Dollar sell-off from its one-day vacation. With the Fed backstop firmly in place on rising interest rates, the US Dollar moved lower across the board, with the dollar index falling 0.50% to 93.26, just shy of my initial 93.20 targets.
Once again, the Euro and Sterling led the general rise versus the greenback. Having held support at 1.1700, EUR/USD finished 0.65% higher at 1.1785 and now looks set to test resistance at 1.1800 ahead of further gains. GBP/USD rose 0.50% to 1.2995, just below resistance at 1.3000. A daily close above the latter opens further gains to the more formidable 1.3200 resistance zone.
Much the same story played out across the rest of the G-10 and emerging markets. A previously notable previous outperformer, the AUD/USD, rose to 0.7180 overnight. It appears to be struggling now ahead of 0.7200, however. Increasing public health concerns in Victoria state, and the threat of community transmission of Covid-19 in New South Wales and Queensland are tempering economic recovery optimism. Until that picture clarifies, further gains by the currency will be much slower going. That is likely to also spill over into its little brother, the New Zealand Dollar which is struggling to break 0.6700.
The US Dollar has edged minuscule higher in Asia as profit-taking from the sharp moves in New York has set in. The effect will only be temporary though, and I expect the US Dollar sell-off to resume once Europe arrives. The Federal Reserve has only reinforced the underlying drivers of the US Dollar rotation after last night.
Oil concerns after a massive drop in US inventories.
Oil prices rose overnight, but not spectacularly so. Oil should have done much better after a massive fall in US Crude Inventories of over 10 million barrels, as well as the tailwinds from a generally much weaker US Dollar. Instead, Brent crude edged just 1.10% higher to $43.70 a barrel, and WTI rose an even less than impressive 0.45% to $41.40 a barrel.
Both contracts remain adrift in their tight one-month trading ranges, with their inability to rise on falling US oil stocks, or a weaker US Dollar an increasing threat to their 3 1/2-month rally. It may well be that oil markets are pricing in a higher risk of an economic downturn in the US and places elsewhere due to Covid-19. It could also be the physical demand has already started peaking. Shale producers hedging production, even at these levels in a desperate race for cash could also be capping price rises. Whatever the reason, the longer that oil refuses to rally on underlying price supportive factors, the higher the risk of a potentially ugly downside correction.
Brent crude has resistance at $45.00 a barrel, with WTI’s resistance now at $43.00 a barrel, its 200-day moving average. Both need to make constructive progress at eroding those levels in the near-term to maintain the bullish case.
A sense of bullish calm returns to gold.
Gold markets put the volatility histrionics of the past two days behind them overnight, with a suitably dovish FOMC and the ensuing weaker US Dollar lifting gold prices. The return to a sense of normality saw gold push 0.70% higher to close at $1970.00 an ounce.
Gold has edged lower to $1964.00 in Asia, with the move looking very much like the profit-taking flows we are seeing in currency markets today. The underlying bullish case for gold remains intact. That is a liquidity-ready Federal Reserve, negative real yields across the US yield curve and a lower US Dollar.
Gold though does now have resistance to overcome ahead of a test of the $2000.00 an ounce region. It has traced out a double top at $1981.00 an ounce, which will provide stern resistance to short-term rallies. Given the volatility of the past two days, initial support is now somewhat distant at $1941.00 an ounce.
Although profit-taking is dominating price action in Asia, I expect upside pressures to resume once Europe and the US arrive at their desks.