Thursday, August 20, 2020

Asia Times: The Fed’s altered tone on forward guidance send reality check to financial markets across the world

  • Dollar
  • Gold
  • Yen
  • Stocks
  • Oil


Market Recap: The Fed’s altered tone on forward guidance send reality check to financial markets across the world

Stocks in the US suffered a retreat on Wednesday after the Fed's July monetary policy meeting minutes for dampened the optimism in the market for an economic recovery in the US. Major indices were mostly trading in the positive region ahead of the release of the meeting minutes, which promptly saw a retreat across most stocks in the hour following the releases. The pullback suggested that the tone of the Fed's meeting minutes was not as dovish as market's were expecting, causing a reality check in the equities market that has largely appeared to have been driven by expectations of stimulus measures. In the Fed's July meeting minutes, forward guidance was suggested to be introduced along with the results of its framework review, a contrast from the slight urgency in tone for use of forward guidance as a tool in the previous meeting minutes. Originally, September was expected to feature some new forward guidance language, which will likely benefit from revisions to the economic outlook. But it now looks more likely that the Fed will push the use of the tool to later in the economic cycle, possibly to January next year to couple it with a statement on its goals and monetary policy strategy as part of its framework review. This appears to be supported by comments from a couple of Fed officials who indicated that forward guidance doesn't seem to be needed in an environment where markets are not expecting tightening of monetary policy yet (Fed Eric Rosengren and Mary Daly has spoken on forward guidance not being needed in recent speeches). The possibility for yield curve control was again dampened by policymakers' in July's minutes.

Indexes Daily Change (%) Net Change Closing Price
Dow -0.31% -85.19 27,692.88
S&P500 -0.44% -14.93 3,374.85
Nasdaq -0.57% -64.38 11,146.46
*Source: Bloomberg

The broad market was affected by the Fed's meeting minutes, with all S&P500 sectors slumping on Wednesday as central bank policy once again takes precedence over other factors. The financial sector fell the least due to the Fed's meeting minutes, supported by major banking stocks. The tech sector was close behind in performance to the financial sector, although major technology companies mostly lagged the index. Apple was one of the exceptions, trading in the green throughout the day and became the first publicly traded company to exceed US$2 trillion in market capitalisation after briefly trading at US$468.65 a share. The real estate sector fell the most, likely due to a 3.3% decline in mortgage applications last week after advancing the week before by 6.8%.

In company news, Nvidia's shares continued to retreat in after-hours trading despite beating out analysts’ expectations in its latest quarterly earnings results. The company reported an adjusted EPS of US$2.18 a share (E: US$1.97 a share) and revenue of US$3.87 billion (E: US$3.66 billion), outperforming expectations as a result of an accelerated adoption of gaming for entertainment and cloud demand by companies amid lockdowns restrictions. But the company's outlook, while also generally better-than-expected, dampened optimism for the chipmaker after CFO Colette Kress commented that data centre sales is expected to only grow in the low-to-mid single digit percentage range in the current quarter as cloud demand maintains its overall uptrend at a slower pace than before due to an imbalanced recovery across industries. No official statement was given on reports regarding talks to acquire Arm Ltd. Nvidia's high stock valuations aside, the chipmaker's outlook still looks to be strong moving forward especially with its new line of gaming graphic cards slated for release in September. It is however, also important to note that the high levels of growth rates across its segments is unlikely to be sustained moving forward as a result of the surge in second quarter of the year. Nvidia's stock fell 2.14% in after-hours trading as a result.


The dollar managed to enjoy a day of recovery thanks to the Fed's meeting minutes. The Fed's less-than-dovish meeting minutes helped to support demand for the dollar. All other major currencies fell against the dollar as a result, as demand shifted back to the greenback likely on both increased risk aversion and the Fed's reduced urgency on forward guidance. Along with an overall reduction in dovishness in its tone, the Fed's meeting minutes also suggested that risks for an economic recovery was tilted to the downside. The meeting minutes, when coupled with the stalemate in fiscal stimulus talks, signals that policymakers should be even more concerned on an economic recovery amid the high levels of uncertainties as well as increased likelihood that businesses may face longer-lasting negative impacts of the pandemic due to the delays in stimulus measures from the White House. While there are temporary measures in place by the US government, the impact from those measures looks unlikely to meet the needs of entire population in both implementation and size.


Gold dips more than silver in a demand shift in traditional safe haven assets towards the dollar. Gold shed 3.67% on Wednesday, as the precious metal looks unable to hold on to gains above the 2,000 mark. The pullback does suggest more profit taking coupled with downside pressure from shift towards the greenback, which could be perceived as a healthy bull run instead of overheated valuations. The Japanese yen fell against the dollar but inched higher against the euro as risk aversion appears to be somewhat present in financial markets on Wednesday. US Treasuries were mixed, with longer-termed treasuries falling with the absence of signals for yield curve control adoption in the Fed’s meeting minutes. Benchmark 10-year yields rose 1.1bps to 0.68% as a result.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -3.67% -73.46 1,928.98
Silver -3.51% -0.97 26.70
USD/JPY +0.67% +0.71 106.12
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.4bps 0.14%
10-Year +1.1bps 0.68%
30-Year +2.8bps 1.42%
*Source: Bloomberg

Oil markets were mixed on Wednesday with losses towards the start of the trading session reversed by better-than-expected signals on demand and supply in the crude oil market. The official US crude oil stockpiles from the Energy Information Administration (EIA) showed US inventories declining last week, along with a dip in gasoline and distillate stockpiles. OPEC+'s meeting outcome on Wednesday on the other hand, could be perceived in opposing ways. The bloc's increased call for compliance suggests that output from member countries may continue to continue over the set limit as over-producing countries compensate in the coming months. But it does also signal the increased reliance of the agreement on compliance by member countries, which could be increasingly more fragile moving forward as prices continue to recover even at a gradual pace. Downside risks to the energy demand's recovery likely also continued to put pressure on crude oil prices. Oil as a result continues to trade at a tight range with no sign of breaking out even after OPEC+'s meeting and the EIA's report.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -0.20% -0.09 45.37
WTI +0.09% +0.04 42.93
*Source: Bloomberg

In Asia, stocks were trading lower on Thursday morning as financial markets track losses in the US following the Fed's meeting minutes. The Nikkei, KOSPI and ASX200 were all trading lower with a skew towards a downtrend in the early hours of Thursday's trading session. Futures tracking major indices in the US were also trading lower as of 9.11am (GMT +8), suggesting that Wednesday's selloff may spill over into Thursday as well.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.37% -85.68 23,024.93 9:01:55 AM
KOSPI -1.68% -39.08 2,321.46 9:21:50 AM
ASX200 -0.98% -60.04 6,107.60 9:21:45 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.23% -64.00 27,568.00 9:11:55 AM
US Futures -0.34% -11.50 3,361.25 9:11:56 AM
Nasdaq Futures -0.40% -45.25 11,286.75 9:11:57 AM
*Source: Bloomberg

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

  • ECB Monetary Policy Meeting Minutes (7.30pm)
  • US Aug 14th Initial Jobless Claims (8.30pm)
  • US Aug 7th Continuing Claims (8.30pm)
  • US Aug Manufacturing Survey (Philadelphia Fed) (8.30pm)

Companies releasing earnings next include (all timings in GMT +8):

  • Alibaba (7.30pm)
  • Pinduoduo (7.30pm + 1)
  • Meituan Dianping (+1)