US equities were stronger overnight with the S&P 500 index making fresh closing highs five days in a row. This is despite Covid-19 outbreaks that reignite the debate about whether equity market gains are sustainable.

Worry centres around the rally’s lumpiness, with the five biggest tech firms putting in the most remarkable performance during the pandemic.

The systematic bid remains in force, and the unquenching appetite for retail to ‘buy the dip’ is muting any downside moves and continue to drive the market higher. Investors do not seem to care about valuations. Tech seems unstoppable or, moreover, contrary to reason and master of the impossible.

Indeed, this is not your dot com bubble frenzy where stocks had huge valuations with tiny revenues. This time around, the big tech firms boast not only massive cashflows but profits to boot.

Average inflation targeting framework

As expected, the US Federal Reserve was the main event overnight, with Chair Powell’s speech codifying a shift to an average inflation targeting framework.

Powell emphasized that the new inflation strategy is “flexible,” with the Committee aiming to achieve this objective “overtime” without defining a specific lookback period or horizon over which to achieve the average (which will sound familiar to those used to the RBA’s weakly specified timeframe for achieving 2-3% inflation).

The revised statement also highlighted that policy decisions would be dictated by “shortfalls” and focus on low-income workers to achieve maximum employment,

I think market expectations were disappointed on two levels: first, the average inflation targeting framework remains vague and unspecific. Second, Powell gave no hints on how the statement change would translate into concrete policy action, including shifting QE purchases to the longer end.

For these two reasons, I think the bond sell-off and stronger dollar made sense.

The question now is what the Sept. 16 FOMC meeting will bring. The most interesting thing about the Average Inflation Targeting framework is that Fed policy’s immense implications will come not now, but later, when the labor market is tight, and inflation is rising.

So, it provides a good backstop if and when inflation picks up.

I suspect the doves will continue to roost, given the details in the Jackson Hole speech are entirely in line with market expectation focusing on strategy first and then the actual implementation in September with a quantified number.

Not only could the Fed give the nod to forward guidance for the fund’s rate to stay at zero until their forecast for inflation one year forward is at or above 2¼%. but they will continue their asset purchases until there is substantial progress on their full employment mandate.

Forex markets

Familiar themes dominate the headlines and offer little of note, leaving FX largely unmoved post-Fed Chair Powell’s speech. US-China tensions continue to simmer, with the US imposing sanctions on companies involved in South China Sea development, while China launched four missiles into the sea in that region.

Still, with the US-China trade deal intact, the markets seem indifferent to tensions on other fronts.

FX traders’ focus will shift to next week, where particular attention will likely be given to US data for August, including the final PMIs and labor market data.

As the Paycheck Protection Program stimulus ran out in early August without the prospect of a quick and full replacement, there is increased uncertainty about the extent of the impact on the US economic recovery.

Yuan retreats

The Yuan retreated due to general dollar strength but holding bullishly below 6.90 on improved US-China trade dialogue.

Ringgit slightly weaker

The ringgit is trading slightly weaker due to the stronger dollar, and we could expect bond duration appeal to ebb with US Treasury yields shifting higher post-Jackson Hole. The local FX market will likely remain in range trade mode ahead of today’s trade report, where it is expected the trade surplus would narrow for July.

Gold remains supported on dips

With the election approaching, a new Fed policy framework explicitly allows for inflation to moderately overshoot the 2% target to catch-up on previous undershooting, and very depressed US real interest rates, some long-term investors will likely continue to want to diversify away from the greenback.

Gold should remain bid on dips through to the FOMC actionable meeting in September. Higher US yields remain the biggest threat to the view as September issuance supply looms.

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