Market Overview

The narratives of the U.S. Federal Reserve’s (Fed) Chairman after a rather walkthrough-room meeting yesterday have not impressed the markets much. It was too casual by pandemic time standards and prompted assets that had been rising in price madly for several days in a row, like gold, silver or some currencies, only to repeat their previous highs this time. That was followed by a slamming wave of profit taking, which triggered some downside pullbacks. For example, just a little bit below $1954/toz in gold spot contracts for now after testing $1980/toz last night. The single European currency briefly touched the clouds, soaring above 1.18 bar vs the Greenback, while the British Pound exceeded 1.30 psychological resistance vs the U.S. Dollar, but then both of them slipped lower to test the nearest technical support levels at 1.1730 and 1.2950 respectively. 

This kind of shake-up showed some intermediary limits of present trends. It may be repeat again over the coming days, and even may extend the price ranges for the particular trading instruments. But it seems to be a temporary re-positioning of market participants, as it had scarcely changed the whole market mood. As Jerome Powell, the Fed's frontman, reiterated all kinds of possible support measures for the global recovery process, it may serve as closely reasoned arguments for such a market view. 

"After precipitous drops in March and April, employment rose strongly in May and June as many people returned to work from temporary layoffs. As a result of the roughly 22 million jobs that had been lost, about one third had been regained as of the June payroll report. The unemployment rate declined in May and June, but at 11.1% it remains far above its level before the outbreak, and greater than the peak during the global financial crisis [after 2008]", Powell remarked, also adding that "the path forward for the economy is extraordinarily uncertain and will depend in large part on our success in keeping the virus in check”. 

Mr Powell also is worried about "some signs... that the increase in virus cases and the renewed measures to control it, are starting to weigh on economic activity". And he made a clear example concerning "some measures of consumer spending based on debit card and credit card use", which have moved down since late June, while "recent labour market indicators point to a slowing in job growth especially among smaller businesses", so that "a full recovery is unlikely until people are confident that it’s safe to re-engage in a broad range of activities". 

However, the strong impression remained that all these negative references were only needed for him to justify the almost endless extension of all the spectrum of extremely dovish monetary incentives, which the Fed badly needs to use as long as possible, as it may support the notion  that this is the only reasonable method to promote the stability of the financial system. The U.S. central bank's balance sheet has already reached almost $7 trillion, and the regulator decided to keep the pace of its asset purchases steady at $120 billion per month, as the Fed is buying $80 billion of Treasury bonds and $40 billion of asset-backed mortgage securities on a monthly basis. And the Fed extended seven emergency lending facilities designed to help markets, now for three more months until the end of the year, even while some of these programs crossed a previous "red line" for the Fed in buying corporate and municipal bonds and also in lending to medium-sized businesses. Powell emphasised that these programs would continue until the Fed is confident the economy is “solidly on the road to recovery.” 

The Federal Open Market Committee (FOMC) of the Fed was also anonymous on the decision to not only keep its federal funds rates close to zero but also in their promise to keep interest rates near zero until employment fully recovers, which means zero interest rates for several years in practice. All the listed topics have struck the chord with the general market public and also big funds too. It seems like the "simple" and the 'smart" representatives of the great market crowd appreciate this approach in the stock markets by raising the U.S. broad market S&P index futures higher to 3260 area again though it slept to 3220 again before the European noon. But this approach works for the long term prospects, and it was fixed again yesterday. At the same time, it doesn't mean that the Fed rhetoric would have any immediate effect. And if the U.S. and global stock markets like the idea of an inflated Fed's balance sheet, then they most probably support the idea of a long trend for a weaker Dollar. 

This point of view is reinforced additionally by the fact that yesterday the Fed confirmed its eagerness to provide its "money printing press" to other central banks as well. They decided to extend Dollar liquidity swap lines again with a number of central banks around the world, so Jeremy Powell was asked how concerned he is about Dollar shortages persisting for a time through the pandemic? And Mr Chairman answered: "The introduction of the swap lines has really restored dollar funding markets around the world to fairly normal levels of activity. And so, they kind of serve their purpose. But, we extended them, I guess, yesterday morning, really to facilitate planning by other central banks, and just so people will know that those facilities are still there. We want them to remain in place and be available as long as they are needed. And since the crisis and the economic fallout from the pandemic are far from over... we’ll leave them in place until we’re confident that they’re no longer needed. There’s nothing that’s going on in the market right now that raises any concerns, it’s just, we want them to be there as a backstop for markets". 

The Fed's fidelity to its "easy money for everybody" course means that a slight shake-up in the markets these days is bringing back to memory rather a sketch or vaudeville style of the market movements in various instruments as a reaction to the Fed's narratives, but it is unlikely to develop into a dramatic price reverse.

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