Chief Market Strategist at FXTM
After
two consecutive weeks of back-to-back declines, global stocks kicked off Monday
with solid gains amid a surge in M&A activity and positive signs towards
vaccine developments. Currency markets were little changed ahead of a busy week
of monetary policy announcements, while Oil and Gold ticked slightly higher.
The
two big deals announced over the weekend were Softbank’s plan to sell chipmaker
ARM to Nvidia for more than $40 billion and Gilead Sciences to acquire
Immunomedics for a price tag of $21 billion. Meanwhile, on the vaccine front,
AstraZeneca resumed its phase-3 trial on Covid-19 after being suspended last
week following a neurological illness developed in one participant, and Pfizer
announced that its vaccine could be distributed before year-end if found safe
and effective.
Central
Banks will take centre stage this week with the Federal Reserve, Bank of
England and Bank of Japan all due to announce policy decisions. Out of the
three meetings, the Fed is likely to be the most watched following its historic
shift towards average inflation targeting. The big question remains how will
the FOMC put this policy into action?
From
what we know now, the Fed is set up to keep interest rates near zero for a long
time, possibly for several years. Given the new framework, any spike in
inflation won’t translate into immediate rate hikes as the Fed wants to
compensate for the lost years when they have failed to hit the target. The dot
plot will be the key guide for investors and traders alike. If inflation
projections remain at 2% or below for the foreseeable future, this will
solidify market expectations for a low rate environment for many years to come.
That said, Jay Powell would still have to explain in more detail how the new
framework will be translated into policy action.
In
June’s economic projections, the Fed anticipated unemployment would be at 9.3%
by year-end, but, in August, unemployment was well below that forecast at 8.4%.
Many other economic data surprised to the upside during the June – August
period in a clear sign that most economists were overly pessimistic towards the
strength of the recovery. However, there is still a considerable amount of
uncertainty given the latest surge in Covid-19 cases worldwide and the US,
especially as we get closer into the winter season. A second wave will
undoubtedly put the recovery at risk in the final quarter of the year and it
will be interesting to see the Fed’s view on that issue.
As for
the market selloff over the past two weeks, the Fed isn’t likely to show any
signs of concern. In fact, policymakers should be satisfied with the pullback
as the risk of a bubble in several assets has been growing due to the Fed’s
extremely accommodative policies. Unless we see another 10 -15% drop, do not
expect the Fed to intervene.
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