Thursday, June 11, 2020

Asia Times: The Fed’s outlook for the US economy gives equity prices a reality check

Tags
  • Dollar
  • Gold
  • Yen
  • Stocks
  • Oil
  • Federal Reserve

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Market Recap: The Fed’s outlook for the US economy gives equity prices a reality check

Stocks in the US mostly retreated for the second day in a row on Wednesday, with the exception of technology stocks as rallies in the airline and energy sectors continue to ease. The shift back towards safer sectors was apparent for the second day in a row with only tech stocks gaining among S&P500, rising 1.69% with the healthcare sector following behind but inched lower by 0.14%. While the Fed's decision on monetary policy helped support equity prices for a moment, Fed Chair Jerome Powell's speech mostly delivered a reality check on the optimism that financial markets has seen over the past week. As expected, the Fed kept monetary policy unchanged during its latest decision and signalled that rates are likely to stay near zero through 2022 thanks to the Covid-19 pandemic. Officials forecasted unemployment to drop to 9.3% in the final quarter of the year, while expecting GDP to contract by 6.5% before recovering in 2021 to expand by 5%. Powell's tone likely weighed on investors' sentiment after acknowledging that while May's unemployment rates were unexpectedly positive, the report also highlighted the high levels of uncertainty surrounding the current economic environment. He also said that there is a possibility that millions of people may not be able to get back to their old jobs and that there may not be a job in a number of industries for them for some time.

Powell's speech and the economic outlook from the central bank's statement highlighted the dovishness of policy makers in the current environment, and sent a signal to the market that it is unlikely that the US economy will return to its state before the Covid-19 pandemic in the near future, which most likely put more downward pressure on equity prices after the week-long rally seen in sectors that were impacted the most at the peak of the Covid-19 pandemic. Another point of view from the Fed was regarding a potential second wave of Covid-19 infections, which the was a notable downside risk when the country was contemplating lifting lockdown restrictions in favor of economic activity over Covid-19 concerns. Powell expressed his views that instead of a nation-wide setback across all sectors, a second-wave is more likely to be in the form of local spikes that could potentially cause more pressure on business sentiment in industries that were already slow to recover. He did however, maintain that the reopening of the economy is a decision for the state and federal governments.

Indexes Daily Change (%) Net Change Closing Price
Dow -1.04% -282.31 26,989.99
S&P500 -0.53% -17.04 3,190.14
Nasdaq +0.67% +66.59 10,020.35
*Source: Bloomberg

The dollar continued its downward momentum on Wednesday, likely as a result of the Fed's outlook for the US economy over the medium-to-long-term. While the dollar spiked up for a brief moment following the announcement of the decision, the greenback continued its downward trend as traders digested the impact of the central bank's outlook. On one hand, demand for the safe haven properties of the dollar fell as the Fed's outlook for the US economy signalled that we have likely seen the bottom of economic activity in the US. But the Fed's weak outlook for 2020 and 2021, its projection for near zero rates through at least 2021 and its pledge to maintain its current pace of bond purchases likely weighed on the greenback. The Dollar Index has returned all of its gains since the start of the year and is currently trading -0.50% year-to-date.

Among major currencies, the Swiss franc and Japanese yen were the top performers of the group, signalling that while the dollar was trading lower, there was still a shift toward lower risk currencies. The likely reason for the shift out of the greenback towards safe haven currencies may possibly be due to the overvaluation in the equities market in the US, which may be cause of concern for a stronger pullback than what we are currently seeing in the past two days.

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Similarly, demand for safe haven assets continued to rise. Gold rose more than 1%, while US Treasuries rose across the board following the Fed's announcement that it will maintain its pace of bond purchases. A signal from the central bank that it was discussing a yield-curve control strategy that will continue at upcoming meetings may have also affected the bonds market. Benchmark 10-year yields fell 9.9bps to 0.73% as a result.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +1.36% +23.37 1,738.70
Silver +3.31% +0.58 18.11
USD/JPY -0.59% -0.64 107.12
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -3.6bps 0.17%
10-Year -9.9bps 0.73%
30-Year -6.9bps 1.51%
*Source: Bloomberg

Crude oil futures managed to inch higher despite data from the US Energy Information Agency (EIA) showing that oil stockpiles in the US rose to 538.1 million last week, the most since 1982. The data as well as rising Covid-19 numbers did weigh on US energy stocks however, after some states including Florida reported a spike in Covid-19 cases. EIA's report did also highlight some improvements in demand for diesel and gasoline demand, which likely helped support crude oil future prices. Reports that two of Libya's biggest oil fields had been shut down again on Wednesday also likely helped curb some of the supply woes in the market. As a result, the outlook for oil remains mostly the same as before. Crude oil futures still look likely to be on a slow track to recovery, since demand should continue to recover. Downside risks are growing however, especially with more tangible data showing spikes in Covid-19 cases in the US, signalling that another slowdown in energy demand may surface.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +1.34% +0.55 41.73
WTI +1.69% +0.66 39.60
*Source: Bloomberg

In Asia, stocks look set to track the US market for a day of losses on Thursday. The Nikkei continues to suffer with the yen strengthening against the dollar. The ASX200 and KOSPI were both down in the first hour of the Thursday's trading session as well. Futures tracking major indices in the US were trading lower on Thursday morning as of 8.48am (GMT +8) as well, signalling that sentiment is continually shifting back towards risk aversion in both Asia and the US.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -1.03% -235.92 22,889.03 8:37:55 AM
KOSPI -0.14% -3.16 2,192.53 8:57:50 AM
ASX200 -1.24% -75.53 6,072.90 8:57:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.57% -153.00 26,679.00 8:46:03 AM
S&P500 Futures -0.42% -13.25 3,162.25 8:49:09 AM
Nasdaq Futures -0.16% -16.50 10,056.75 8:48:54 AM
*Source: Bloomberg

Economic data release for the day ahead include (all timings in GMT +8):

  • US Jun 5th Initial Jobless Claims (8.30pm)
  • US May 29th Continuing Jobless Claims (8.30pm)