US equities were stronger overnight with the S&P, yet again posting a new record following gains in Europe and a mixed session in Asia.
Tuesday’s running of the bulls came after the US and China reaffirmed a commitment to their “phase one” trade deal. According to news reports, China has said it would buy a record amount of US soybeans this year, with the total probably reaching around $40 billion.
Given that co-operation between the world’s biggest economies has been few and far between following weeks of squabbling over technology platforms, the trade talk soothing comes as a welcome relief to investors.
Markets are now turning bullishly focused on US Fed Chair Powell’s speech at Jackson Hole, which is expected to be a very market-friendly delivery.
After all, I do not think anyone is willing to bet against the Fed finding a way to sound overtly dovish, especially during this pandemic induced easing cycle.
Helping sentiment was a much better read on US durable goods orders in July, with headline orders rising 11.2% driven by a strong rebound in the auto sector, with the motor vehicle and parts orders rising 21.9%mom
US dollar little changed
The USD is little changed as the consolidation phase extends for another day in light news flow.
Interestingly, the dollar has divorced itself a bit from the equity rally in recent sessions as popular trades like long EURUSD and gold consolidate near the current range’s lows.
There is some concern heading into Powell’s Jackson Hole speech as to what the fresh news could be considering 5-Year Treasuries are near 25bp, and we are heading into a large amount of fall Treasury supply.
With markets continuing to see the glass half full, it takes a brave person to try and go the other way. This week’s story about a decade low in US equity short interest suggests that perhaps people have given up trying to short the equity market and have decided to move on. Precisely what they are moving onto remains the question.
Gold rallies alongside lower US dollar. But if US Fed Chair Powell’s speech does not meet dovish expectations, gold may stall and move back in reverse.
Gold was mostly on the defensive in the Asian session and most of the European trading as US yields moved higher, suggesting gold was about to settle into a very defensive posture.
But then gold received a boost in US trading as investors continue to monitor US fiscal developments. Gold investors’ eyes and ears are trained on Powell’s scheduled address at the Jackson Hole Symposium on Thursday.
Expectations of hints of more monetary stimulus bolstered gold, but the buying was against very thin selling.
But what is essential for longer-term gold fortune is that the approach to central banking is about to flip on a dime.
The potential is that the Fed will adjust its policy framework as profoundly as Paul Volcker did on Oct. 6, 1979, when he announced a switch to managing bank reserves rather than the Fed Funds rate.
Since that date, the global central bank model has been geared towards the prevention of inflation.
So as opposed to viewing the FED mandate as an inflation fighter, Chair Powell will try to be the Fed’s first inflation igniter.
The contrarian trade
Stocks have been powering ahead even as fixed income has shown sings of selling off more profoundly, reflecting investor optimism about the economic outlook. A crucial part of it has likely been related to expected coronavirus vaccine progress, even while financial data have suggested that the recovery is losing its swagger.
The question is whether less-than-expected dovishness in Fed Chair Powell’s virtual Jackson Hole speech tomorrow or a lack of an action at the September FOMC meeting would have the power to disappoint markets.
My sense is the equities market will focus on the longer-term ‘Fed put,’ which will be there for as far as the eye can see, but that fixed income could react with more curve steepening.
International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp