Markets Jul 28

Markets edge higher eyeing dovish Fed

Wall Street buoyant after Senate Republicans unveiled their proposal for the next round of federal coronavirus aid 

Markets edge higher eyeing dovish Fed
A waiter wearing a face mask serves coffee and food in Mexico. The impacts of the coronavirus pandemic are expected to drive economies lower for many years, analysts have said. Photo: Reuters.  

(ATF) Investor sentiment is upbeat ahead of the Federal Reserve’s two-day meeting, where the US central bank is expected to reiterate its dovish message, although no move is expected.

Gold continued its surge and the US dollar tumbled as investors awaited the approval of a $1 trillion stimulus package amid a renewed increase in Covid-19 cases around the world.

Japan’s Nikkei 225 is up 0.33%, Australia’s S&P ASX 200 is 0.33% higher and mainland China’s CSI 300 benchmark has leapt 1.06%. Hong Kong's Hang Seng benchmark has also advanced 0.84%.

More than 16.4 million people have been confirmed to have the coronavirus and the pandemic has claimed more than 652,000 lives across the world.

Fitch Ratings said the impact of the 2020 coronavirus recession on GDP will continue to be felt for years to come, with GDP levels in the largest advanced economies expected to remain around 3% to 4% below their pre-virus path by the middle of this decade.

"There will be lasting damage to supply-side productive potential from the coronavirus shock as long-term unemployment rises, working hours fall and investment and capital accumulation slow," Maxime Darmet, director in Fitch's Economics team, said.

Wall Street gains

Overnight, Wall Street’s gains were fuelled by expectations of a dovish Fed and after Senate Republicans unveiled their proposal for the next round of federal coronavirus aid — the Health, Economic Assistance, Liability Protection and Schools (HEALS) Act.

The Dow Jones Industrial Average advanced 0.43%, the S&P 500 gained 0.74% and the Nasdaq Composite jumped 1.67%.

The Federal Reserve announcement could be a damp squib, or even lead to some modest fixed income selling to take profit, Steve Englander, Standard Chartered's head of Global G10 FX Research, said.

“It would be a big policy shift if the Fed had to meet both inflation and UR targets as prerequisites for hiking, but we doubt that the FOMC will make such a radical shift,” he said, while adding that the revised targeting framework would be vague.

Analysts do not expect big policy statements on yield curve control or quantitative easing.

Credit markets are trading firm with primary issuances from Jiangsu Zhongnan ConstructionCountry GardenChina Construction Bank and CSC Financial  in the market. The Asi IG index is marginally tighter at 74/75 bps with sovereign CDS moving in by 1-3 bps.