Markets Awaiting the Fed

What's New

. It's all about pausing today, as equity markets in Asia remained flat, the USD was around its two-year low, and gold steadied around $1960, as worries about the US economy made investors more cautious and looked to Congress and the Federal Reserve for a boost.

. MSCI Asia-Pacific (ex. Japan) was up 0.1, with gains in China offsetting the small losses elsewhere. In Japan, the Nikkei was down 0.8%, while S&P500 Eminis were down 0.22%.

. On the policy front, the Fed is expected to strike a dovish stance at its policy review later in the day and perhaps open the door to a higher tolerance for inflation - expectations were driven by the extension of several lending facilities. This could support the Dollar bears who believe that such a move will further cut yields and push the currency lower. On the other hand, a less dovish than expected statement could push the dollar to a small rebound.

. At the same time, news are expected regarding the new $1 trillion fiscal rescue package which, despite the Senate presenting it, is at an impasse. The Republicans' $1 trillion proposal includes cutting the weekly $600 unemployment benefit, which expires on Friday, to $200. Not much support was received for the plan, as Democrats are pressing for a larger spending commitment and President Trump said he didn't like elements of it.

. As analysts note, given that 30 million people are unemployed and more than 70% of US GDP is consumption, this could have a strong impact on the country's economic activity. Still, even an extension with cuts would be better than no extension at all. Analysts expect significant volatility if support is pulled.

. As a result of the uncertainty, the bond market was also in a cautious mood ahead of the meeting, after selloff yesterday, with US 10-year yields standing at 0.5823%.

. In the currency markets, the USD was slightly higher than a two-year low, but having lost more than 3.7% in July thus far, headed for the worst month in nine years. The Euro was steady at $1.1723, while the Yen was at a four-month top at $105.09.

.The Aussie dollar dropped after worse than expected data releases - consumer prices in 2020q2 fell by the most on record. As it appears, low for long interest rates are here to stay in the country.

. In commodity markets, copper prices were back at their two-year highs, reached two weeks ago, on hopes that the economic rebound, which would be further assisted by the US fiscal packages, will help boost industrial demand.

. Gold hovered around $1,960 per ounce, down from the $1,980 high reached yesterday, but still having gained nearly $150 over the course of less than two weeks.

. Oil prices were slightly higher, with Brent reaching $43.29 per barrel and WTI at $41.03, after a surprise drop in US inventories pointed to increased energy demand.

. In other news, Singapore's unemployment rate rose to 2.9%, as the country's coronavirus cases jump and visitors were banned, effectively pushing workers in the tourism sector out of work. Similarly, in Thailand, no visitors were recorded for the third straight month.


Up and Coming

. German import prices are forecast to have continued their drop in June, declining by 5.1%, a sign that inflation in the country will remain muted. At the same time, Spanish retail sales are forecast to have dropped by 17.6%y/y in June.

. Despite the worsening in the UK economy, mortgage approvals are expected to have tripled since the previous month.

. In the US, pending home sales are seen to have increased by 15%m/m, following the 44.3% in the previous month.

. For oil traders, a small increase is forecast for crude oil inventories, at 0.35 million barrels.

. The most important news of the day will be the Fed meeting later today and its interest rate decision which, even though expected to experience no gain, could provide some guidance for the future course of policy.



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