Market Overview

European stocks today did not immediately join the new acceleration of the American market's rally. The U.S. S&P500 broad market index updated its all-time peak above 3,500 points in early Asian hours and kept most of the fresh gains before the Old World's trading start. But the pan-European Euro Stoxx 50 index and the German DAX30 slipped at the open on Friday as a response to a disappointing GfK Consumer Climate indicator from Germany, which remained in negative territory falling to -1.8 points from an upwardly revised -0.2 points in July. 

The Gfk consumer index in Germany rebounded from its April's bottom of -23.1 points up to -9.4 points in June, but kept the negative readings in July and August that sowed the seeds of doubt about the pace of the recovery. The French consumer spending rose but just within 0.5% vs the similar data in July, slowing the speed from a spurt of 10.3% in June. European indexes lifted in spirits and bounced back quickly as the local consumer data could not overshadow the global positive sentiment generated by the speech of Jerome Powell, the U.S. Federal Reserve’s (Fed) Chairman, who announced the Fed policy shift at Jackson Hole online symposium. 

It would be too premature to assert that Mr Powell made a real verbal or financial revolution by his words, but he articulated a sweet-sounding stance to achieve not just a rigid inflation target but an inflation range averaging two % "over time", with an intention to compensate the long-lasting periods "when inflation has been running persistently below two %" with other periods of the above-two % inflation "for some time," in order to guarantee the proper and high employment level and growth. Jerome Powell remarked that low unemployment is positive, especially for less-advantaged groups like African Americans, linking the lasting work of the Fed's money printing press to the relevant agenda for the American society, adding that "it is hard to overstate the benefits of sustaining a strong labour market, a key national goal that will require a range of policies in addition to supportive monetary policy", and that "a robust job market can be sustained without causing an unwelcome increase in inflation". 

Before saying this, he compared the current situation to what the Fed faced about forty years ago, when then-Chairman Paul Volcker made a series of controversial interest rate hikes aimed at curbing inflation. Over the years, the fundamental changes in the world economy, particularly demographic and technological ones, have shifted the Fed's focus to inflation stimulating measures, as the price pressure almost disappeared. The current situation, according to Powell, could lead to an undesirable fall in long-term inflation expectations, which in turn could further reduce the actual inflation, leading to an adverse cycle of ever lower inflation and inflation expectations. Consequently, there would be little room for policy makers to lower rates during times of future economic shocks. But Mr Powell noted that the level of neutral interest rates, which is not limiting or pushing growth, has dropped significantly over the years. 

Combined together, all of these alludes to the notion that the Fed is going to keep near-zero or very low interest rates even for much longer time than was previously expected, although there were no explicit promises to keep rates unchanged for the particular period of time. The speech itself lasted just under an hour, along with a questions and answers session, and it was not particularly bright. Some users' comments during a YouTube translation of Mr Powell's speech on Reuters channel seem to be more exciting. Here are just several of them: "Get that bum off stage, bring out the money printer! Show us the brrr machine!.." or "he should just literally say brrrrrrrrrrr for an hour, or say "we print til it breaks" and "keep printing!!!! let inflation skyrocket plzz". Another user wrote that "Jerome Powell, or JP means JAPANisation of the U.S. financial system, and the Depression 2.0 on the horizon". 

These remarks characterise  a very common view of many traders and even fund managers on the positive future of stock prices, as they would be more and more pumped up with money, and on the negative long-term prospect of the U.S. Dollar due to the uncontrolled operation of the "money printer" mentioned above. Therefore, less than 24 hours after the speech of the Fed's Chairman, the Greenback continues to go into a deep nosedive against the entire basket of the reserve currencies, including the Euro, the British Pound, the Aussie, the Qiwi, and the Loonie. Even the Japanese Yen is strengthening vs the USD very fast in spite of the constant intense work of the Bank of Japan's own "money printer" and despite the information that the Japanese Prime Minister Shinzo Abe has decided to resign, as Reuters reported citing a person familiar with the matter. 

A public broadcaster NHK earlier said Abe, who has battled the disease ulcerative colitis for years, wanted to avoid causing problems for the government due to the worsening of his condition. “There's some nervousness and concerns because he's the longest serving prime minister and, with him gone, there could be some uncertainty. Perhaps 'Abenomics' is coming to a close. And perhaps we could see some repatriation and this is why the yen has strengthened somewhat,” said Moh Siong Sim at Bank of Singapore in a Reuters report. 

As for the general trend for the U.S. Dollar to other currencies, “the Fed keeping rates lower for longer – and showing greater tolerance for higher inflation – is a key ingredient in the current narrative of negative U.S. real yields de-basing the Dollar,” said analysts at ING in a research note. “The key barrier to a further immediate sell-off in the Dollar, however, is positioning. Net speculative shorts against the Dollar and long EUR/USD positioning are close to the extremes of March 2018,” he added. Perhaps, some considerations of that kind, as well as the fact that the Fed's message was already essentially priced in beforehand, plus the need to keep the U.S. Dollars to invest more to the growing U.S. stocks, were reasons for the initial volatility in the currency market last night, when the Greenback fell, then quickly rose, then weakened again before the market choose the direction for its next bigger-sized move.

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