The Federal Reserve became an accidental Lone Ranger overnight, riding in to rescue beleaguered financial markets that had circled the wagons over secondary COVID-19 outbreak fears. Europe and Wall Street had followed Asia south before the Fed announced an expansion of its direct lending program to small and medium businesses, and more significantly, that it would commence buying individual corporate bonds in the market.
The timing was accidental rather than deliberate. But with the Federal Reserve back in business backstopping corporate credit, and printing money to lend to companies directly, it was immediately back to business as usual for the peak-virus, buy everything herd. Wall Street equities unwound losses, finishing in the green, the US dollar sagged, and energy and commodities rallied.
Until such a time that the reality of the economic fallout of COVID-19 is felt in credit markets that central banks aren’t propping up, life will move blissfully on. I can only envisage that massive shutdowns of parts of China or the US could knock the buy everything rally off course for any sustained amount of time. There is a noticeable trend around the world now by governments choosing growth over graves.
The Fed’s largesse has flowed into Asia this morning, with equity markets powering higher, as yesterday’s worries are consigned to history. The RBA minutes were published early, with the central bank reiterating that interest rates will remain lower for longer, until its employment and inflation targets were in sight. That Fed-like mantra will be repeated across the globe for a long time to come. In that context, we should not be surprised by the overnight price action. Resistance is futile.
The data calendar is light in Asia today. The Bank of Japan has just announced an unchanged rate decision at -0.10%. It has left its yield curve control target constant at 0.00%, maintaining its target purchases across a myriad of instruments, ranging from J-REITs to corporate bonds. It has raised its Special Lending Program target to JPY110 trillion from JPY75 trillion. With no surprises, USD/JPY is sharply unchanged at 107.40.
Today, UK Claimant Counts and Unemployment, along with US Retail Sales and Industrial Production are the highlights of the session. In the UK, claimant counts are expected to halve to around 400,000, with unemployment rising to about 5.0%. Any fallout is likely to be limited to sterling though. US Retail Sales are forecast to recover to 8.0% from a 16.40% drop last week. Industrial Production is expected to improve to 2.90% MoM but remain lower by 18.0% YoY.
Just announced, and likely to further boost markets is news that the Trump administration is working on a $1.0 trillion infrastructure fund to boost the economy. If we recall back to President Trump’s election triumph oh so long ago, an almost identical policy initiative was the centrepiece of his platform. That quietly died a death with nothing heard for four years. Anyone would think there is a Presidential election in November.
Asia equities jump on Federal Reserve stimulus and Trump infrastructure
Yesterday’s concerns have dropped quickly from the hive memory, with Asia recovering back those losses with interest this morning. Wall Street rallied impressively from deep in the red after the Federal Reserve announced the start of its small business lending, and corporate bond-buying programmes. The S&P 500 finished 0.83% higher, the NASDAQ 1.44% higher, and the Dow Jones 0.62% higher.
The Nikkei is 4.0% higher, with the KOSPI spiking 4.50% higher. Mainland China sees the Shanghai Composite and CSI 300 both 1.0% higher, with the Hang Seng jumping 3.0% higher. Singapore and Jakarta are recording gains of 2.50%, while Kuala Lumpur is up 2.0%. It is all hands to the wheels in Australia as well, the ASX 200 and All Ordinaries both 4.0% higher.
The impressive gains in Asia will continue throughout the remainder of the session, with Europe sure to climb aboard as well. The Trump infrastructure plan will turbo-boost any individual companies and sectors, likely to have even a sniff of part of the action.
Markets return to selling US dollars
Business as usual returned to currency markets as well after the Federal Reserve announced it would start buying corporate bonds. COVID-19 was quickly consigned to the dustbin as the rotation out of US dollars got back on track, the Dollar Index of major currencies falling 0.60% to 96.73.
Having been hit hard yesterday, the commodity currencies have recorded outsized gains over the last 12 hours. AUD, ZAR, MXN, CAD, NZD and RUB are all in the green today, with MXN and RUB notable outperformers, both higher by over 0.50% in Asia.
The EUR/USD has risen 0.80% in the past 12 hours to 1.1340 in Asia and looks set to retest 1.1400. GBP/USD rose 0.50% in New York, and is 0.50% higher Asian in Asia at 1.2665, and looks set to retest its 200-day moving average at 1.2685. Gains in the pound may be limited by nerves over Brexit talks, however.
Across Asia, local currencies have edged higher versus the dollar. MYR is a notable outperformer, climbing 0.50% to 4.2590 this morning, boosted by the rise in oil prices overnight.
The US dollar sell-off looks to have resumed in earnest, backstopped by the Federal Reserve and the Trump infrastructure project.
Oil rebounds sharply on Fed stimulus measures
Oil enjoyed an impressive rebound overnight, as the Federal Reserve announced the start of its corporate bond-buying program. Oil reclaimed all its COVID-19 losses with Brent crude finishing 2.70% higher at $39.80 a barrel, and WTI was finishing 2.30% higher at $37.10 a barrel.
Yesterday in Asia, it was notable that Asian buyers appeared as buyers of the dip. Oil is unchanged in Asia today from the New York close, and it seems that local buyers again, prefer to wait for dips to buy, rather than chasing markets higher.
The news that President Trump is considering a $1.0 trillion infrastructure program will almost certainly boost prices on both crudes again once Europe arrives. Brent crude has an initial target around $43.00 a barrel, followed by $45.00 a barrel, the top of its chart gap from March. WTI will find strong resistance at $40.00 a barrel though.
Gold treads water after surviving a Fed sell-off
The Federal Reserve announcements saw gold fall in a robust kneejerk reaction overnight before recovering. At one stage, gold fell $30.0 an ounce to $1705.50 an ounce before recovering to $1725.00 an ounce, 0.35% lower on the day. In directionless trading, gold has risen in Asia by 0.30% to $1730.00 an ounce.
The speed of gold’s recovery overnight suggests that there are now a lot of buyers waiting in the wings to pounce on significant dips. Support now lies between $1700.00 to $1705.00 an ounce. That said, gold now has several daily tops forming strong resistance at $1745.00 an ounce, ahead of the $1765.00 an ounce region, the top of its multi-month range.
Despite the noisy price action, gold remains marooned in its three-month 100-dollar range. If markets are about to receive another Federal Reserve sugar hit, gold may find the topside challenging going forward still.