(ATF) Asian markets are trading cautiously after the US Federal Reserve painted a gloomy picture for the second half of the year but investors are hoping the US Senate will revive stalled negotiations on the next round of pandemic aid.
The US Federal Reserve minutes for the July 28-29 meeting said the ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near-term, and poses considerable risks to the economic outlook over the medium-term.
“The projected rate of recovery in real GDP, and the pace of declines in the unemployment rate, over the second half of this year were expected to be somewhat less robust than in the previous forecast,” according to the discussion of the committee.
The committee also did not consider that yield curve control was an option – “many participants judged that yield caps and targets were not warranted in the current environment but should remain an option”.
This triggered a sharp sell-off at Wall Street with the Dow Jones Industrial Average falling 0.31%, the S&P 500 down 0.44% and the Nasdaq Composite slipping 0.57%.
“We do not see the minutes as negatively as did the market,” said Steve Englander, Standard Chartered’s head of Global G10 FX Research and North America Macro Strategy.
He said the minutes also indicated that ongoing asset purchases intention had shifted from stabilising asset markets to a strategy meant to support recovery.
“This could mean in terms of keeping long-term rates low to support housing, for example, but also using credit policy more aggressively to reduce spreads and support activity.”
China LPR steady
On Thursday, China held its loan prime rate steady as expected – the one-year rate at 3.85% and the five-year rate at 4.65%.
“It seems that policymakers see little need to engineer a further decline in bank lending rates given the relatively rapid economic recovery and the continued prop from loose fiscal policy, which is set to drive a further improvement in activity in the coming months,” Julian Evans-Pritchard, senior China economist at Capital Economics, said.
“We think the next move in the LPR will be an increase, though probably not until next year once the economy has fully recovered and returned to its pre-virus growth path.”
The risk-off sentiment helped gold stabilise at $1,944 per ounce after the overnight losses and US Treasuries have inched up with the 10-year yield marginally lower at 0.66%. The US dollar has also recovered, rising against a basket of currencies to above 93.
The Nikkei 225 was down 0.65%, the Australian S&P ASX 200 has slipped 1% and mainland China's benchmark CSI 300 is off 1.1%. The regional underperformer is the Hong Kong benchmark HSI, which has fallen 1.98% weighed down by financials after China held interest rates.
Credit markets remain busy with Nan Fung Intl’s 10-year bond, Emperor International’s bond exchange offer, Nanjing Jiangbei’s short-dated bonds, Hong Kong Electric’s 10-year bond, and China Jianyin’s two-tranche issue in the market.
But secondary markets are in line with the broad risk-off mood with the Asia IG index wider by a basis point at 64/65 bps.