US equities were stronger on Friday with the S&P up a further 0.7%, marking the seventh consecutive up day and setting a fresh record high in the process.
In the wake of the US Fed’s dovish tilt last Thursday and better income and spending data released on Friday, stock market investors were diving in headfirst again.
The market continues to run hot after US Fed Chair Powell tipped his hat to a lengthy period of easy Fed policy with “unconventional tools” – QE and the like – being used for longer.
And with a low, neutral fed funds rate, a de-emphasis of inflation overshoots, and a focus on employment, monetary policy will highly be stimulative for a long, long time. Indeed, music to the stock market’s ears.
The Powell Pivot provides an immense double-barreled monetary policy support, and for stock market investors, it points towards a deliciously dovish future.
Recall the Fed began cutting in mid-2007 and did not raise the rate until late 2015 (and this rule points to that being premature), but COVID-19 was a much more massive hit to the labour market than the financial crisis. So, we could be looking at the first hike into 2028, provided there are no further hiccups.
US dollar weakens
The US dollar is weaker as traders placed a very dovish spin of the Fed shift to inflation targeting. Surprisingly on Friday, the giant swing lower occurred in Asia, suggesting USD bearish positioning in Asia was lighter, and so with the Jackson hole “event” out of the way, the USD selling resumed.
Inflation in the Fed’s preferred measure has averaged only 1.5% over the last decade, and high unemployment should keep price pressures relatively low over the near-term, triggering the USD sell signal. This, despite the key dollar sell signals not flashing as US real yields rose, so it is likely the lower for longer narrative that is music to the dollar bears ears.
With Abenomics officially over, the USD is dipping again but not breaking down completely. We are at multiple critical levels in almost every pair. On USDJPY the market has yet to get comfortable on any moves below 104.50 dating back to 2017.
While Abenomics was not much of a thing anymore as the policy broadheads have dulled, so it might be too easy to brush the resignation off, but it is not bullish USDJPY, we know that for sure.
The European Central Bank (ECB) stands “ready to do more as needed.”. Given the strength of the EUR, it is not helpful for economic revival. It will be interesting to see if the currency features more prominently in ECB rhetoric in the weeks ahead.
The rising COVID-19 case count means the European economy needs all the help it can get. More generous accommodation may weaken the EUR.
The ringgit gains ground
The ringgit closed the week out strong on the back of the broadly weaker US dollar and higher oil prices, which should continue to resonate with local traders after the Powell pivot opened the door to a lower US dollar. MYR should perform well in a USD weaker environment, significantly if CNH is strengthening. Exports have returned to positive territory, and the currency is still undervalued.
Gold put in a strong rebound in Asian and European trading Friday, which extended into US action. The primary catalyst to gold’s impressive recovery lies in USD weakness. The USD fell in Asia, where investors took a more dovish spin on the Fed’s announcement of a shift to a flexible average inflation target policy, which triggered gold’s rally.
The firmer Japanese yen (JPY) may also have been a factor, following Prime Minister Abe’s resignation announcement. Gold’s gains continued in European hours as the USD remained weak.
For many months, gold was more impacted by bond yields, especially the yield on the US 10- year, than any other single factor.
However, historically gold is usually more influenced by the USD, which is inversely correlated. It was the USD decline that boosted Gold on Friday.
It seems unlikely gold will completely divorce from bond yields, not to mention some of the drivers used by USD bears (and gold bulls) in the past did not signal USD weakness (or gold strength) in the last 48 hours.
Helping the dollar bear narrative and bringing US dollar Asia sellers to the table, to date US-China trade tensions on the economic level appears to have completely thawed. All of which suggests gold is on shaky ground if the Euro weakens and the US yields continue to rise.
International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp