Equity markets vaccinate against losses

Markets expect dovish Fed decision

After a few tough days at the office, US equity markets found their footings overnight, which mechanically flowed through to a slightly lower US dollar and higher precious metals market. Although the evening was heavy on headlines, notably in the M&A space, it was short on meaningful content. In typical fashion, market participants looked for a story that fitted nicely with the price action and decided that vaccines fitted the bill nicely. Always a go-to when stock markets rise for no reason, then there were more buyers than sellers. AstraZeneca recommencing its Phase 3 trial, and Pfizer expanding theirs fitted the bill nicely.

This state of affairs is likely to continue ahead of the FOMC rate decision and accompanying statement in New York on Wednesday afternoon. We can expect more range trading ahead of the decision, and more fitting of stories to the price action. It would be of no surprise if an expectedly uber-dovish FOMC re-energised the buy everything FOMO trade to some degree, though. Anyone wishing anything different from a central bank anywhere now should slap themselves repeatedly while saying “lower for longer” over and over again.

Today in Asia, the Reserve Bank of Australia will release its last meeting minutes. There should be no market-moving surprises, and if anyone wants to know what they’re going to say, please re-read the paragraph above.

Of far more interest to Asia will be the China data dump today. China releases Fixed Asset Investment, Retail Sales, Industrial Production and Unemployment for August. The Industrial Production and Retail Sales data will be of most interest to market participants. Industrial Production is expected to rise to 5.1-% YoY, with Retail Sales growth climbing back to 0.00% from -1.10% last month. Markets are looking for continued confirmation that China’s export and domestic recovery remains on track, and that is what we expect to see as well. That should energise equity markets across the region, although, if the data disappoints for some reason, a quick reassessment may be necessary. In this environment, though, it is likely to be quickly dismissed as a mere “hiccup” in the overall improving trend, and then promptly dismissed.

In Japan, Yoshihide Suga was appointed as the new Prime Minister as expected. PM Suga also retained Taro Aso as finance minister and deputy PM. Attention will now turn to whether a new election will be called sooner rather than later. The only notable reaction in markets was USD/JPY falling 50 points to 105.80 overnight.

Ructions are continuing in the United Kingdom over the proposed Internal Markets Bill, which will unilaterally rewrite the Brexit agreement with the European Union. Sterling rose strongly as senior Conservatives protested against the bill, but the first reading passed handsomely in the UK Parliament anyway. Given the healthy winning margin, hopes of a sustained sterling appreciation are likely premature. Financial markets have not fully priced in Brexit risk as the transition period nears its end. Either from the perspective of the implications for Britain of the Internal Markets Bill, or the likelihood of no trade agreement with the European Union. The sterling rally overnight looks like one to sell, not join.

Germany’s ZEW Economic Sentiment Survey will be the highlight of the European session. The September data is expected to fall slightly to 69.80, but with Covid-19 surging again across the single market, a larger than expected fall could weigh on the Euro and European equities.

Overall, the buy everything FOMO trade is dipping its toes back in the water after being giving a harsh lesson in two-way price action last week. We are likely to continue the gentle ascent for equities ahead of an expectedly dovish FOMC decision, with only occasional headline-driven short-term volatility likely to rock the boat.

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