European equities are set to move back to yesterday’s highs after minor risk-on rotation in the US has supported equities in Asia.
Today is the month-end for UK equities given closures Monday. Along with this, volumes will be backed by MSCI index rebalances.
Endorsement of inflation averaging was expected, but the critical dovish points were around social elements in employment, which implies a longer time for the recovery to “normalise” and will keep interest rates lower for longer.
So effectively, the Fed is providing the markets with both inflation averaging and social employment policy backstop.
And the later has piqued investor interest as to see social and demographic concerns become such a formalized part of a central banks’ mandate is striking and a considerable departure from central bank norms. Indeed, lower for longer is music to stock market investors’ ears.
Investors are revelling in the fact that the FOMC continues to prioritise Main Street’s back. Not only will the Jobs policy be geared to getting low wage earners back to work (hopefully at higher salaries), but these are the types of policy shifts that can reduce social discord in the US; hence it’s being viewed very favourably by markets.
The European Central Bank (ECB) speakers overnight gave little away in terms of insight into the ongoing review.
Japan PM to resign
In Japan, the NIKKEI -1% after a low CPI print, as well as concerns over Prime Minister Shinzo Abe’s health, some articles indicating he is looking to resign to avoid disruptions to the government.
The transition from Abe to a new leader is vital for Japan’s future. Still, the near-term implication is limited as the broad contour of economic policies is unlikely to change, especially under the Covid-19 situation. Importantly, Kuroda, the Bank of Japan (BoJ) governor, will most likely stay until the end of his term in April 2023.
While there are some market comments that his resignation could prompt the JPY to appreciate and Japan’s equity prices to fall, the impact will be more limited as the news is not new. Policy contours are unlikely to change within the LDP government with current policy geared to a pandemic world.
The US dollar came under pressure at first but then squeezed higher on the U-turn in rates. It later ran out of steam and sold off into the European open again. The FX market is currently caught in the wash cycle trying to find what up or down but deferring to what it knows best these days which is to sell the dollar when risk turns on.
USDJPY was initially trading bid in Asia, testing towards 107. It then dropped to 106.10 from 106.70 on the headlines that Japanese PM Abe is expected to resign. Bounces have been limited to 106.40/45. Given this news, in combination with the generally soft tone to the US dollar, the risk is skewed towards the further downside in USDJPY
USDCNH continued to drift lower following broad dollar moves.
Gold is moving higher on the dollar weakness but lower of longer also appeals to the gold crew.
Oil is struggling to move topside getting weighed down by the usual Covid-19 concerns that keep people planted in their homes while traders are factoring in some US regional demand devastation as the storm surge could negatively affect some Panhandle business activity as well as consumer mobility over the short term.
The swath of hurricane carnage comes at a bad time as the Panhandle is a favourite Labour Day weekend destination for South Eastern US residents.