European and U.S. futures are trading lower today, as investors are anxious about lofty valuations. Traders are also concerned about the Federal Reserve’s cautionary note about the U.S. economy. The fact that the Fed isn’t confident about the U.S. economic recovery has put traders off.
The Fed has made it clear that the path of recovery is still very dependent on the virus situation. This pandemic is a healthcare crisis, and if the virus situation isn’t contained, especially when the winter flue-season hits, the health crisis can become a lot worse. Yes, the coronavirus situation is improving across the U.S. sunbelt, but the emergence of virus hotspots remains a vital threat.
Investors should be taking comfort in the Federal Reserve’s comment, not the other way around. If the Fed sees the economic recovery from the same lens as some of the policymakers in Washington-who are responsible for delaying the second stimulus check- the Fed could possibly change its narrative on its monetary policy. A hawkish monetary policy may not be positive for the equity markets.
We all know that the global stock market is addicted to quantitative easing. The absence of Q.E. or tapering of Q.E. could create real chaos in the markets, and this could happen at the wrong time. For that reason, we believe that the Federal Reserve has sent the dovish message as a precaution. That’s because they want to see a few more sets of economic readings, and especially how the containment of the coronavirus plays out, before they alter their view.
Another factor that is upsetting the market players is the simmering geopolitical tensions between the U.S. and China. In a recent move, the Trump administration poked China once again yesterday. The U.S. announced it is suspending its extradition treaty with Hong Kong. The U.S. is also ending its reciprocal tax treatment with Hong Kong, and all these measures are due to the new security law imposed in Hong Kong by China.
As mentioned several times before, China is a sleeping giant, and so far, we have not seen China adopting aggressive measures. It has only announced retaliatory actions. An aggressive action would be when China starts to poke the U.S. and begins to take measures that could really annoy them.
Dollar
Investors are also praying that Washington policymakers come to their senses and start acting in favor of the nation and stop playing politics. Both Democrats and Republicans are miles apart in terms of the second stimulus aid package, which is desperately needed, as the U.S. economy is more likely to stall in the absence of it. Even if both starts negotiating the second stimulus aid package again, reaching an accord is still highly unlikely until next month. It is small to medium-size businesses that are likely to suffer the most. Democrats and Republicans have indicated that they are likely to revive the stalled negotiations again.
In the currency market, we have seen the dollar index pairing some of its losses. A small retracement after a massive sell-off is not an unusual activity. The fact is, there was nothing in the Federal Reserve’s statement indicating that the Fed is thinking of a change in its monetary policy stance. It is highly unlikely that there will be any change in their monetary policy at least until the end of the third quarter. And only after that, there could be some hints of the Fed altering its monetary policy-provided that the recovery remain stable and the coronavirus situation is contained. This means the current retracement in the dollar index could be nothing more than just profit-taking among traders.
Gold
The strength in the dollar index triggered the initial sell-off in gold prices, but the shiny metal has pared some of yesterday’s lits yesterday’s losses. Looking at the price action on a daily chart, the upward trend for the gold price is still robust, and it is likely that the price may continue its upward move.
Oil
Oil prices have eased off from their five-month high mainly because OPEC+ wasn’t confident that oil demand has much of an upside. OPEC+ had a cautionary tone in relation to oil demand, and this has taken some wind out of the oil trade. OPEC+ said the pace of global economic recovery is slower than the expectations. They also cautioned about the impact of the second coronavirus outbreak and its adverse influence on the global economy. The cartel urged other member nations to respect their oil quotas and to adhere to strict discipline in terms of oil production.