Markets Jul 30

Fed's support pledge boosts markets

Asian markets buoyant after the Federal Reserve left rates unchanged last night; EM debt and gold looking attractive while the US dollar is under pressure

Fed's support pledge boosts markets
Fed chairman Jerome Powell is seen beside the Federal Reserve flag. It keep rates unchanged overnight. File pic by AFP.

(ATF) Asian markets are trading higher after the Federal Reserve’s statement assured its support for the world’s largest economy while keeping rates unchanged at near zero. As expected this has put more pressure on the US dollar and increased the attractiveness of hard-currency EM debt and gold.

Overnight, the US Federal Reserve saidat the end of its two-day meeting to discuss rate setting, it would use its tools and act as appropriate to support the economy. It kept interest rates unchanged, as expected.

“To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning,” the US central bank said.

Dollar liquidity swap lines

The Federal Reserve also extended its dollar liquidity swap lines with the central banks of Australia, Brazil, South Korea, Mexico, Singapore, Sweden, Denmark, Norway and New Zealand. In addition, the Fed also has standing US dollar liquidity swap lines with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank.

Wall Street was boosted by the support measures with the Dow Jones Industrial Average climbing 0.6%, the S&P 500 rising 1.24% and the Nasdaq Composite advancing 1.35%.

“If anything, there was more mention of fiscal policy than monetary policy in Powell’s speech. Certainly, while investors ears were leaning into Powell’s comments, their minds will likely also be trained on discussions currently underway in Congress about the forthcoming fiscal cliff,” Seema Shah, chief strategist at Principal Global Investors, said.

“Concerns around rising virus cases and their impact on the labour market and activity will be further compounded if Congress cannot agree on a new fiscal stimulus package before the summer recess. With special unemployment benefits set to expire at the end of this week, the recovery is at stake.”

Gold was off highs but continues to trade at above $1,962 per ounce with investors worried about limitations of stimulus efforts globally.

“Policy makers may have to maintain a breakneck pace of fiscal and monetary policy stimulus as far as the eye can see, boosting the case for our $3,000/oz 18-month gold target,” analysts with BofA Securities said in a note.

The dollar remains under pressure with the greenback trading at 93.35 against a basket of currencies.

'Good news for EM and Asian markets'

“The Fed’s commitment to keeping yields low has already depressed the US dollar, but this is good news for emerging markets and Asian assets, both in fixed income and equities,” Tai Hui, a global market strategist at JPMorgan Asset Management, said.

“Hence, we believe investors should take a closer look at Asian equities, especially sectors with a strong structural growth theme in China, Asean and South Asia. This should offer additional diversification opportunities to a balanced equity/bond portfolio.”

Hong Kong’s Hang Seng index has advanced 1.1%, Australia’s S&P/ASX 200 has added 0.9% and China’s CSI 300 edged up 0.2%. Japan’s Nikkei 225 index was flat, flitting between negative and positive territory, with the surge in retail sales in June helping the benchmark off its early lows.

Credit markets were well bid with the Asia IG index moving in a basis point to 73/74 bps. Redco Properties is in the market with a bond offering following its upgrade by Fitch Ratings. The pipeline is expected to remain busy amid the backdrop of a weak dollar.