Markets Aug 28

Risk asset rally assured after Fed review

US Treasuries sold off, yield curve steepens after US Fed review; Australia underperforms after renewed outbreaks; Gold shines 

Risk asset rally assured after Fed review
A man wearing protective face mask walks in front of a stock quotation board outside a brokerage in Tokyo in this file photo from March 2020. Asian markets were boosted by the Fed's review stance. Photo: Stoyan Nenov/ Reuters.

(ATF) Asian markets rose on Friday after the US Federal Reserve’s framework review convinced investors rates would stay lower for longer and that would be supportive of risk assets such as emerging markets stocks and bonds.

Overnight, the US central bank switched its focus to employment and showed it was less worried about inflation in formulating monetary policy. The Federal Reserve issued a revised statement on longer-run goals and monetary policy strategy.

Japan’s Nikkei 225 rose 0.54%, China’s CSI300 advanced 1.04% and Hong Kong’s Hang Seng index added 0.87%.

Gold advanced 0.6% to $1,940 per ounce and US Treasuries saw continued selling, with the 10-year yield rising 3 basis points to 0.78% from overnight levels. The benchmark has added 10 bps from the level before the Fed’s statements.  

One significant revision was the Fed’s view on maximum employment with the central bank underlining it as a “broad-based and inclusive goal” and that it will driven by its "assessments of the shortfalls of employment from its maximum level" rather than "deviations from its maximum level."

Powell said in his post-statement speech that “this change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation.”

Bank of Singapore chief economist Mansoor Mohi-uddin said: “The Fed’s dovish move will continue to support risk assets, weaken the USD, steepen the US Treasury yield curve as inflation expectations rise while still keeping yields at very low levels.”

Analysts said the steepening of the yield curve with the gap between the 2- and 10-year yields widening to 62 basis points from 55 – reflected expectations the short-term yields would be well anchored.

Bank of Singapore’s Mohi-uddin expects the new strategy will lead to the Fed keeping its Fed funds interest rate at 0.00-0.25% for up to the next five years.

“The US Treasury yield curve steepened overnight as expected, reflecting that markets do expect the long-term growth and inflation outlook to improve with this new framework,” Tai Hui, chief Asia Market strategist at JP Morgan Asset Management, said.

“The search for income for Asian investors will continue – this should be supportive of risk assets such as equities, corporate bonds and emerging market fixed income.”

But Australia’s S&P ASX 200 fell 0.59% after fresh coronavirus outbreaks forced officials to issue public health alerts and impose restrictions.

On the data front a comprehensive view of global economic conditions midway through the third quarter will be provided by worldwide PMI surveys next week, culminating with the US non-farm payroll report.

“PMI data will add clues as to the durability of China’s upturn, while GDP in India and Australia are expected to show economies contracting sharply. The RBA is meanwhile expected to hold rates unchanged at 0.25% but analysts will be eager for clues as to what might trigger further action,” said Bernard Aw, principal economist at IHS Markit in Singapore.