Given all the communication mistakes of the last few years coupled with the realization that the Phillips Curve is so flat that record-low jobless numbers doesn't necessarily bring inflation, and the extent of economic damage done by the virus, the markets weren't expecting the Fed to raise rates until 2025 anyway.
This shouldn't take away from just how dovish the Fed was on Wednesday. Ultimately this should unquestionably shore up the market backbone as it continues to claw back losses from last week's tech sector rout. After all, Powell was as dovish as he can rhetorically, which should be enough to keep markets stable.
And we should expect the wall of money and "four bastions of tech to re-engage, computerization, digital transformation, workflow automation, and e-commerce simplification". After all, the mega-cap tech stocks have good reason to cope with the virus well, if not take outright advantage due to the lengthy stay at home employer mandates.
But standing in the way is the US election risk, where the visible view is emerging that with the Fed out of the way (and potentially running out of bullets), recovery slows. And as the cost of protection to hedge against US Election risk rises, investors will need to de-risk their crowded positions to protect overall portfolio performance
But do keep your eye on the prize as the next significant catalyst for stocks and even central bank policy are probably the vaccine results in late September or early October. So, over the short term, we could still see a tendency to sound the retreat due to election risk but the market will look to risk up if the vaccine trial results prove to be all systems go.
Forex
The level of USD/JPY is implicitly not a major concern for the BoJ yet. It probably wants to wait for global trade flows to normalize before attempting unconventional measures that could lean against FX strength. That is unlikely anytime soon. The Fed is in the driving seat in terms of monetary policy credibility. Credibility today equals the ability to weaken one’s currency, which points to USD/JPY downside.
China Stocks
Since the US started pressing Chinese companies listed in the US, there has been a spate of 'homecoming' IPOs (Alibaba (NYSE:BABA), JD.com (NASDAQ:JD), NetEase (NASDAQ:NTES), etc) and privatization bids. The latest is 51job (NASDAQ:JOBS), which rose 17% last night after DCP Capital Partners made a non-binding bid for all company shares. This follows other privatization bids on 58.com (NYSE:WUBA) and Bitauto (NYSE:BITA).
Tencent’s Gaming Business In U.S. Crosshairs
Tencent (OTC:TCEHY) closed -2.4% on Thursday after the US government sent letters to video game developers with ties to Chinese companies on security protocols related to the handling of personal data. US gaming revenues contribute to 7-8% of Tencent’s topline and bottom line. While the effect of this action is still unknown, anti-China rhetoric is likely to increase into the November US elections.
Oil
Saudi Arabia's Prince Abdulaziz bin Salman read the riot act to cartel members who cheated on production quotas. While Russia's Energy Minister Alexander Novak chimed in for good measure saying the group should continue to strive for high compliance. When you have the two of the biggest oil producers signing for the same compliance song page, markets will undoubtedly listen.
Friday Forex Views
As much as Interbank Pros would love to squeeze the EUR/USD longs but they are finding it hard to look past USD weakness from a central bank that will allow inflation to run 'hot,' as the labor market heals against the backdrop of a large external deficit.
But it was CNH centric currencies that were the anti-dollar driving force in the market post FOMC. The dollar downside in North Asian currencies remain firm - USD/CNH, USD/KRW, and USD/TWD their fundamentals intact, given increasing China trade surplus and tech export recovery for Korea and Taiwan.
The ringgit has held on to recent gains and traded at a seven-month high at one point this week. With the Fed risk out of the way and with the MYR still cheap relative to the regional basket and oil prices stabilizing higher again, the ringgit should continue to get stronger provided China recovery remains COVID free as Malaysia exports to China will most certainly continue to improve with mainland retail consumption demand catching up to the China industrial engines firing on all cylinders
Sure, profit-taking was the theme in Asian trade with USD/CNH leading the way higher after the FOMC, but that was quickly faded as currency traders found it hard to imagine a scenario where the Street does implicitly decide that the FOMC is not dovish enough.
USD Views
After a short-lived attempt to make new lows in August, the dollar has entered into a prolonged period of consolidation. While the linchpin of dollar bearishness is evident for all to see, due to fiscal and monetary led currency debasement alongside Chinese growth, the short-term prospects are still mixed.
There is a lack of clear-cut catalysts until perhaps vaccine results closer to month end, and by then, the reaction could be muddled as we head into a month of US election uncertainty.
European asset allocation story has been a flop; German growth is still strong. It will continue to improve given its exposure to China, the rest of Europe is struggling to battle the rise in COVID cases, and now by the overhang of UK politics could provide the darkest cloud of all.
As a result, the path of least resistance for the dollar has shifted towards China. Like past global growth slowdowns, China's ability to generate a credit on the spot has led to the most enduring post COVID recovery. While most Asian economies also do not have to deal with a new rise in coronavirus cases. It is notable that despite the recent weakness in equities, China demand proxies like copper and iron ore have gone moonshot, and so has Asia FX with USD/CNH making new cycle lows. And this has led to AUD outperformance.
Lastly, USD/JPY has piqued the market's interest again the moment it traded below recent lows. Japanese PM Abe's decision to stand down represents the end of an era. Using flow dynamics and accounting for real rate differentials, the yen screams as much as 15-20% % too cheap. The new PM will face a more challenging environment where all the easy policy options have been tried, his authority is more limited, and for the first time in a decade, JPY outflows are reversing as FDI outflows drop sharply in a lagged response to corporate profits plummeting and supply chains being internalized. The long JPY trade has little to do with Fed policy but has much to do with the shifting tides of real money flows.
Yen's strength seems the most likely outcome of PM Abe's early resignation. His surprise departure due to poor health marks the end of a period of innovation, and with Japan's retail investors set to bring their money back into Japan, there is scope for significant yen gains.
Gold Markets
The gold market remains mired in no man's land as gold investors stay in stasis, questioning the Fed's ability to generate inflation rather than its resolve to hold rates down.
Even though interest to buy gold has faded a lot, gold seems to have set a temporary bottom. At the same time, investors like gold because the FOMC's new policy roadmap solidified expectations that rates will stay low for a long time. Still, the elusive catalyst that takes the market above $ 2000 remains the big mystery, and the indecisive price action is telling.
With nary a rise from inflation breakevens, the longer we consolidate and as positive vaccine news trickling in, the greater the risk for gold prices to move lower.
Oil Markets
In a week where oil price fragilities were exposed after traders digested a combination of gloomy agency short-term forecasts, It was Saudi Arabia throwing down the gauntlet, publicly raking laggards over the coal while emphatically calling for OPEC+ members to meet their quotas that gushed oil prices to their most massive three -day advance since May.
During the OPEC+ Joint Ministerial Monitoring Committee meeting, Saudi Arabia's Prince Abdulaziz bin Salman read the riot act to cartel members who cheated on production quotas. While Russia's Energy Minister Alexander Novak chimed in for good measure saying the group should continue to strive for high compliance. When you have the two of the biggest Oil producers signing for the same compliance song page, markets will undoubtedly listen.
And while traders had already been nudging prices higher pre JMMC expecting a resolute messaging around quota compliance and compliance catch up where necessary so that global inventories continue to fall But this was a case where OPEC + over-delivered on both fronts as Prince Abdulaziz pulled no punches but instead he came out swinging.
Another substantial rise in price over the past 72 hours as crude markets recover. Energy traders were prompted to push prices higher by a redoubtable combination of China's reflation impulse and the bullish EIA US oil inventory stats. Drawing any real inference on the underlying US market is difficult because of the data's noise. Still, the bearish builds in products unequivocally suggest weak demand, pointing to the markets Achilles heel and could ultimately prove short-term price capper.
Oil has recovered from recent lows, in line with a rebound in broader markets, but will remain sensitive to the pace of the global economic recovery and news about global supply. The near-term upside in US production and the Libyan output recovery to normal levels if the current ceasefire holds are critical risks over the remainder of 2020.