Market Overview

31 August 2020

"Money Printer" and Some Chinese Positive Supporting Markets

The Greenback and global stocks continue to follow the trend set by the speech of the U.S. Federal Reserve (Fed) Chairman Jerome Powell at the Jackson Hole Symposium last Thursday. In particular, the U.S. Dollar index futures for September (DXU0) updated the low of the year in early Asian hours today, and is closely approaching another psychological mark of 92 points, which is a minimum price since May 2018. 

The "money printer" message is in action, although it was formally made in the mild form of just changing the inflation targets from a specific figure of two % to a wider range around this value. But de facto, this means the Fed could allow very low interest rates, just near zero levels, for several years ahead and even after the inflation starts to rise, although this moment is not even on the horizon yet. Moreover, they are going to print money in a framework of the so-called quantitative easing (QE) to buy government and corporate bonds added by mortgage-backed assets for hundreds of billions of U.S. Dollars even beyond direct pandemic excuses. 

As a result, EUR/USD traded above 1.19 before last week's close and is trading above 1.19 after the European noon with a proposed intention to test a strong technical resistance around 1.20. The Euro wins because the European Central Bank (ECB) knows when to print enough means print enough, and the European Commission places an attractive large loan on the market under the common guarantees of all EU countries, to fulfil the New Generation EU anti-crisis plan. In this regard, much attention will be focused on the ECB meeting, which scheduled to be held on September 10, as it may place some additional accents on monetary policy measures for the rest of the year. Speaking on the same Jackson Hole virtual stage, the European Central Bank’s chief economist Philip Lane argued that the effect of monetary policy so far during the pandemic had been insufficient. Ulrich Stephan, Deutsche Bank strategist, noted that the ECB is likely to increase its bond-buying program further in the face of sub-target inflation. He added that this is more likely given the risk that the EU parliament may not approve the proposed European Recovery Fund at the first attempt on September 18. 

The Australian government debt securities with their highest AAA rating, better coupon income and a smooth yield curve, are direct competitors to the U.S. Treasury bonds, burning the fire of interest for the Aussie. Therefore, AUD/USD has broken the technical upward channel valid since mid-July on Daily charts to reach a new high of 0.7380 for now, which is exceeding the previous peaks of August by more than 100 basis points. Following the trend in the currency of the neighbouring country, the New Zealand Dollar just slightly missed the high of January, which is several points above 0.6750, but managed to rewrite the price peak of this summer. 

The Chinese yuan is also gaining, with USD/CNY below 6.85, but the Heavenly Empire's currency fate is a more controversial case, due to the numerous risks of China-U.S. relations. The outcome of their disputes is still unclear. For example, the sale of TikTok’s U.S. operations has been complicated by new Chinese regulations restricting the export of artificial intelligence technology. And some of Chinese largest banks reported their biggest quarterly drop in profits in a decade, due to bad loans and tighter lending spreads. But some activity in China's services sector enhanced at a much faster speed in August, as the official business survey showed. The non-manufacturing purchasing managers index (PMI) rose to 55.2 points after 54.2 points a month ago, and the composite PMI, including the manufacturing sector too, showed 54.5 points in August after 54.1 in July. So, services performed better than manufacturing last month, supporting hopes that private consumption is getting better. The demand is recovering not only in China but throughout the world, according to the previous PMI readings from Europe, the United States, the British Isles and many other continents and regions. The recovery in Chinese demand propped up oil prices, so that the North-Sea Brent benchmark is trying to breakthrough above the "demarcation line" of this summer, which is located around $46 per barrel. 

As a result, the STOXX Europe 600 Oil & Gas sector index (SXEP) rose almost one % in the first trading hours on Monday, which helped the composite pan-European Euro Stoxx 50, and the national stock indexes of Germany, France and other EU countries also to jump. Altogether, the Euro Stoxx 50 added more than four % since the beginning of August, but of course, it is not growing as much and as fast as the U.S. S&P500 broad market index or the Nasdaq high-tech index. Both of the most popular U.S. indices updated their all-time highs again, amid the mentioned Fed hints for fresh huge amounts of printed money soon and due to the depreciation of the U.S. Dollar too, as the Dollar is a unit of measure for both the value of U.S. stocks and indices. American stock markets may need to take a short pause for two or three days after uninterrupted escapades for several days, but they are unlikely to stop at the levels they have already achieved for a longer period of time. 

The U.S. Food and Drug Administration (FDA) head Steve Hahn, in an interview to the Financial Times, said he’s open to fast-tracking authorization for drugs treating Covid-19 but only if the benefits to public health outweigh the risks. This comment supported the markets too, as it was made a week after President Donald Trump's criticism as he accused the FDA of delaying drug authorizations in order to hurt his election chances. “It is up to the sponsor [vaccine developer] to apply for authorization or approval, and we make an adjudication of their application. If they do that before the end of Phase Three, we may find that appropriate. We may find that inappropriate, we will make a determination”, Mr Hahn added.

 

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