US stocks finished stronger overnight with the S&P500 rising 1.3% after a sideways session in Europe and gains through Asia.

US equities are leading the way again. The positive charge is being attributed to corporate deals with several company announcements in the spotlight, such as Softbank, Gilead, and Oracle. There have also been more constructive comments on a possible COVID-19 vaccine from Pfizer.

The primary market narrative has not changed – a cyclical recovery over the next year, driven by a gradual return to work.

However, sitting on top and king of the super short-term momentum trade has turned into the proverbial “tail wagging the dog.”

The mega-cap tech stocks have ample reason to cope with the virus well, if not reach outright supremacy. But this moment has created an all-powerful and self-activating force that continues to attract well-established quant funds and day trader alike.

Still, it is not the choppy seas but the undercurrent that pulls you into the rocks. With a growing divergence between buoyant markets and still-tepid economics, those are the undercurrents that could always present the biggest challenge to the view.

Focus on the US Fed

Unless there is a surprise at the Federal Open Market Committee (FOMC), I do not think this week’s Fed meeting will matter much to financial markets. The next important catalyst is probably the vaccine results in late September or early October.

But it could still be a massive week for the US dollar and risk in general as the Fed uses the second opportunity to explain precisely what Flexible Average Inflation Targeting means.

Currently, traders are still a tad confused by the absence of exact average inflation targeting (AIT) parameters post-Jackson Hole.

We all understand what the AIT means for the future: The Fed will stay lower for longer when the unemployment rate falls. They will not hike rates until actual inflation has been above 2% for a while. This shift from proactive to reactive is well understood. But what does this mean for policy today?

End of Abenomics

As expected, Yoshihide Suga was voted in as ruler of Japan’s Liberal Democratic Party yesterday, leaving it almost inevitable that he will be voted in as PM in a vote in the Diet on Wednesday. The focus will now turn to a snap election prospects to help the new PM secure a popular mandate.

Speculation is rampant that might happen as soon as October.

Abenomics officially over, the USD is dipping again but not yet breaking down completely. Still, multi-year levels sit near. While Abenomics was not much of a thing anymore and so your first reaction might be to say the resignation does not matter much, it is not bullish USDJPY, and we know that for sure.

Brexit tension rising

Tensions within the UK conservative party over the PM’s internal market bill continue to fester. There will likely be no clarity on Brexit well into November or even December, suggested by the latest sharp deterioration in the tone of negotiations.

But with a still reasonably healthy investor view on the GBP, that political brinkmanship is part and parcel to the UK strategy to get a deal ultimately, this has limited last week’s sterling drop.

What is the timeline now? Brexit negotiations have not been formally suspended though it is hard to see much of anything getting when the chief negotiators are engaged in foul-tempered twitter exchange.

Forex: Dollar & gold prices

The twin fates of the US dollar and gold are inextricably intertwined these days, so as price action confluences around $1950-60 whichever way the market breaks, that should be a strong signal for dollar direction after the FOMC.

The Yuan

China has never hidden its intention to boost the Yuan’s status on the international stage and that its Belt and Road initiative was a key mechanism. As one official put it in a recent media article: “The Yuan accounted for about 2% of global reserves and 1.76% of cross-border payments by the end of June…. It’s not commensurate with our country’s status as the world’s largest foreign trade country”.

Markets seem to care little about the process of gradual economic disengagement between the US and China, deferring to the argument that China can stand up on its own two feet.

The monthly China data dump could go a long way to confirming the Yuan’s market bullish read.

The Ringgit

After substantial gains as the MYR healthy beta to the Yuan makes it even more attractive than just its yield advantage vs. the US dollar, I would expect some pause on the bullish proceeding ahead of the FOMC meeting on Wednesday.

But with the stronger Yuan foretelling a weaker US dollar, I would expect gains picking up post FOMC once the risk has been cleared.

Life after the gold rush

Gold needs the US Fed to make a credible promise to act irresponsibly and aggressively drive inflation expectations higher.

Amid all the excitement about the Fed’s new average inflation targeting regime, the market remains in a world of confusion as to what it means for today.

Perhaps we might be less confused after Wednesday. The Feds could show higher for gold if they decided that stoking inflation is an immediate concern. But they could as soon send gold lower if they choose that slow and smooth is the way to shift from stabilisation to accommodation.

International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp