Three Key Fundamental Points This Week
1) Covid-19 Second Wave
This week we have seen growing evidence of a second wave of Covid-19 cases in the US;
- Texas on Wednesday reported 2,504 new coronavirus cases, the highest one-day total since the pandemic emerged.
- A month into its reopening, Florida this week reported 8,553 new cases (the most of any seven-day period).
- California’s hospitalizations are at their highest since May 13 and have risen in nine of the past 10 days.
“There is a new wave coming in parts of the country,” said Eric Toner, a senior scholar at the Johns Hopkins Center for Health Security. “It’s small and it’s distant so far, but it’s coming.”
This data was reported in a widely circulated Bloomberg article on Wednesday night.
At its meeting this week, the FOMC opted to leave rates unchanged at 0.0-0.25% and the Fed’s QE programme was formalised at a minimum of $80bln/month plus $40bln/month in Mortgage-Backed Securities.
We had the usual dovish tone from Powell (reiterated his pledge that the Fed will continue to use its full range of tools to support the economy).
The Fed also released its new batch of economic projections, which forecast a 6.5% contraction for the US economy in 2020, followed by 5% growth in 2021. Powell acknowledged strong recent NFP numbers, but played down the importance of reading too much into one number.
Following remarks from a number of policymakers in recent weeks from Vice Chair Clarida, Williams and Kaplan, who have all indicated that a yield curve control (YCC) policy is worth studying as a way to reinforce forward guidance, Chairman Powell also noted that the FOMC received a briefing on yield curve policies, but he stressed that this remains an open question and the Committee will judge what policies are needed as events unfold.
Some analysts and traders had been anticipating that the FOMC would be bolder on the issue of forward guidance, enacting YCC and giving more clarity on the economic conditions that it wishes to see before tightening policy again. They were let down, as the Fed appears to be more willing to take its time at the moment.
3) Risk off
The two above themes combined to trigger a decisive risk off move on Thursday.
The S&P 500, which began the week above the 3200 level, now trades below 3100. Front-month WTI crude oil trades below $37, having tested the $40 level towards the start of the week.
Risk FX has also been on the back foot this week; AUDUSD has been sent back below 0.6900, having started the week around 0.7000 and NZDUSD has been sent below 0.6500.
It's been a good week for havens; gold has recovered to around $1740, after beginning the week around $1680. USDJPY has plunged to the mid 107s from just shy of 110.
USD, meanwhile, is pretty much flat on the week, and seems to be forming some kind of reversal Doji candlestick on the weekly.
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