Friday, August 28, 2020

Asia Times: Powell’s speech sends gold and the dollar swinging as the central banker confirms possibility on lower-for-longer interest rates

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Market Recap: Powell’s speech sends gold and the dollar swinging as the central banker confirms possibility on lower-for-longer interest rates

Powell surprises the market with explicit inflation target changes starting a large shift towards riskier asset classes. Fed Chair Jerome Powell said in his speech at the Jackson Hole symposium on Thursday that the central bank would shift to an inflationary target that "averages" 2% over time. While no mathematical formula was specified for its use, investors can likely infer that the Fed is providing itself more flexibility moving forward, since it will allow the central bank to keep monetary policy at low levels for an extended period by letting inflation overshoot after the current period of weakness. Expectations in the market was likely for at most some hints on the outcome of the framework review instead of a confirmation that Powell unveiled. This likely resulted in the sharp spike at the start of the trading session in equity markets.

Indexes Daily Change (%) Net Change Closing Price
Dow +0.57% +160.35 28,492.27
S&P500 +0.17% +5.82 3,484.55
Nasdaq -0.34% -39.72 11,625.34
*Source: Bloomberg

Gains from Powell's speech were curbed by stimulus worries and unemployment woes. Financial assets spiked the moment Powell expressed the central bank's goal to shit to an average inflation rate target, notably with the US stock market showing a shift towards riskier sectors as most of the winners over the past couple of days suffered a retreat while airline and cruise liner shares dominated the top gainers in the S&P500. But even gains in airlines and cruise liners lost steam towards the end of the trading session after US House Speaker Nancy Pelosi issued a statement signalling that little to no progress was made in stimulus negotiations. Tech and tech-related shares dragged on the S&P500, with the exception of Microsoft, HP and Salesforce as companies with B2B functions will likely benefit more from an extended period of low interest rates as compared to B2C focused companies.

Abbot Laboratories' stock spiked 7.85% after the US Food and Drug Administration (FDA) cleared its 15-minutes virus test kit. News that US President Donald Trump was seeking to buy 150 million of its tests kits in a US$750 million deal sent the company's stock skyrocketing while its competitors such as Quidel Corporation (-21.70%), Co-Diagnostics Inc (-13.19%) and GenMark Diagnostics Inc (-12.77%) dived. Also notable was Walmart's 4.54% stock surge after the company was reportedly joining Microsoft and Oracle in a bid for the US operations of TikTok.

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The dollar remained mostly unchanged against most other G10 currencies despite Powell's unexpected announcement. The initial impact of Powell's speech was a sharp dip in the Dollar Index down to as low as 92.42, before jumping right back to its pre-announcement level. The overall movement in the dollar may be explained by the impact of unemployment looking to flatten out at extreme high levels in addition to downward pressure on the euro as Covid-19 cases re-emerge in a number of member countries. But it does also suggest that irrational money may still be dominating the market since the change in the Fed's stance should theoretically put downward pressure on the greenback since interest rates are expected to stay low for longer. Initial jobless claims fell to 1.006 million (E: 1.000 million) for the week ended August 21nd while continuing claims fell to 14.535 million (E: 14.4 million) for the week ended August 14th. Seasonal adjustments likely did likely overstate the decline in initial claims however, since seasonal factors had expected an increase of 12,140 (or 1.4%) from the previous week. Additionally, markets may have already priced in Powell's speech and the initial movement was only a blip from the transparency of the entire speech.

Among G10 currencies, commodity-related currencies mostly gained against the dollar, while lower-risk currencies fell. The Australian, New Zealand and Canadian dollar rose against the dollar as it is expected to benefit from a longer economic recovery cycle in the US after Powell's announcement, while the safer Japanese yen fell the most among the basket of G10 currencies. The euro fell as well (to add the largest downward pressure on the Dollar Index) as Italy, France and Spain reported the highest number of new daily cases in months, likely thanks to the increase in human movement between and within member countries during this vacation period. Reports from the Daily Mail suggesting that EU Chief Negotiator Michel Barnier isn't optimistic of a post-Brexit trade deal with the UK may have added downward pressure on both the euro and sterling as well.

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Gold surprisingly suffered after Powell's speech to lose another percentage point, while longer-termed US Treasuries dipped as the yield curve widens. Gold highlighted the divide in the views among market participants. While the prospects of lower interest rates for longer should be a driver for gold, Thursday's price movement in gold (as well as the dollar) was suggestive that market participants may be concerned on the uncertainty of policy decisions moving forward. Comments from Fed officials post-Powell's speech that the new policy will only range moderately above the 2% target to around 2.5% may have also weighed on the precious metal since it may have been below investors' expectations. The Japanese yen fell against both the dollar and the euro. US Treasuries fell across the board following the selloff after Powell's speech, with benchmark 10-year yields surging 6.4bps to 0.75%. 30-year yields spiked 9.6bps higher as well to 1.51%, the highest since June 23rd.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -1.28% -24.92 1,929.54
Silver -1.76% -0.48 27.02
USD/JPY +0.55% +0.58 106.57
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.8bps 0.16%
10-Year +6.4bps 0.75%
30-Year +9.6bps 1.51%
*Source: Bloomberg

Oil markets were mainly impacted by the effects of Hurricane Laura on Thursday. Laura made landfall early on Thursday in the US as a category four hurricane but weakened into a tropical storm. While the storm sent power outages across the region, it appears that refineries, including the largest US refinery, avoided the worst of the damages. Oil futures dipped as a result, reversing most of the gains earlier this week. While more than 80% of crude oil output and three million barrels a day worth of refining capacity shut before the storm reached the Gulf of Mexico, the lower-than-expected damages from the storm is likely to cause another dip in oil prices as the rate of restarts in the region will likely impact both crude oil supply and demand perception in the region. We may see oil futures continue to dip slightly today as a result, but it appears likely that crude oil will still end the week with overall positive gains.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -1.21% -0.55 45.09
WTI -0.81% -0.35 43.04
*Source: Bloomberg

In Asia, stocks were trading mostly higher likely as investors price in the positive impacts of the Powell's speech in the region. Surging yields in the US may be indicative of a possible shift towards the Asian region, as investors look for higher risk weighted returns, while stocks generally benefit from overall increased risk appetite. The Nikkei were trading higher in the early hours of Friday's trading session, with the Nikkei likely to benefit from the weaker yen as well. The ASX200 fell in contrast to its Japanese and Korean counterparts, possibly as the surge in its currency decreases incentives for its exports. Futures tracking major indices in the US were trading higher as well as of 8.42am (GMT +8), although gains were skewed towards the Dow, implying that we may see another dampened tech sector while riskier sectors surge again on Friday in the US.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +0.25% +57.76 23,266.62 8:32:35 AM
KOSPI +0.58% +13.68 2,358.13 8:52:30 AM
ASX200 -0.92% -55.83 6,070.40 8:52:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.16% +46.00 28,514.00 8:42:36 AM
US Futures +0.15% +5.25 3,490.50 8:42:36 AM
Nasdaq Futures +0.09% +10.75 11,963.50 8:42:36 AM
*Source: Bloomberg

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

  • Germany Sep Consumer Confidence Survey (Gfk) (2pm)
  • Germany Aug Inflation Rate (Harmonised CPI/CPI) (8pm)
  • Canada Q2 GDP (8.30pm)
  • US Jul Personal Spending/Income (8.30pm)
  • US Jul Inflation Rate (Core PCE/PCE) (8.30pm)
  • BoE Governor Bailey's Speech at Jackson Hole Symposium (9.05pm)
  • US Aug Consumer Confidence (U. of Mich) (F) (9.45pm)