US equities were more robust before the usual after-hours profit-taking set in on Wednesday.
The fact that equities have mostly recovered all pandemic losses even as the real economy is nowhere near achieving that, it just seems so remarkably ridiculous that I’m also finding it difficult to comment.
Investors have this proclivity to continually turn a blind eye to the lack of any progress on the US fiscal front while content to fade the always cautious Fed. And probably thinking, correctly mind you, the more worrying they are, the longer rates stay low.
But even worries around stalled US fiscal talks are partly offset by the US administration’s conciliatory tone on China’s compliance with the “Phase One” trade deal.
The upcoming six-month assessment seems unlikely to prompt any significant fireworks.
Also, investor’s optimism remains high on a vaccine cure that is no longer viewed as a pie in the sky. Not to mention investors continue to run with the premise that during an election year, no politician wants to wear the “Frugal Freddy” moniker.
But the long and winding economic road ahead was underscored by pessimistic Fed commentary overnight, with Boston Feds Rosengren (Hawk) noting that the recovery may be losing steam and that continued stimulative monetary and fiscal policy “is critical.” Mary Daly (dove) from the San Francisco Fed indicated the recovery would not be V-shaped.
Don’t tell President Trump that as he was out in full glory after the close touting that the US economy is performing significantly better than Europe, the 50% rebound in the stock market signals a V-shaped recovery is in play.
After another choppy and busy day, risk assets held sway as the latest fiscal storm has passed – at least it appears that way for now. Despite rates higher again, there has been a reversal of the past few days’ actions with mega-cap tech back in the lead, healthcare acting much better, and most cyclicals underperforming.
USD/Asia traded with a bid tone in the Asian morning session yesterday as precious metals took a hit and the US dollar, in general, turned stronger but has partially reversed.
But overall, in G-10 and Asia FX, the consolidation pattern in FX continues with some modest USD weakness again overnight. With stocks higher, the dollar lower, FX markets revert to trend which shows the USD is still very much in risk-on risk-off mode.
Of course, the ambiguity of which direction the dollar should take is a bit head-scratching. It seems the lack of a US stimulus agreement is good for the dollar when logic would suggest the failure to secure a deal would cause the USD to weaken, given the threat it would pose to the recovery. Who said FX trades in a logical pattern these days?
My main view for the ringgit which has been consistent all along has been provided we clear the trade talk risk hurdle with China reaffirming the P1 trade deal, the local unit will revert to its newly found positive trend.
The uptrend is supported by higher oil prices and better than expected global economic recovery and the likely shift to a weaker US dollar ahead of the September FOMC.
But rising US yields present a challenge to that view.
International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp