Fed minutes waltz away with risk appetite

Morning Note

FOMC minutes are casting a shadow over markets and underline that any recovery is not going to be a straight line of advances. The Fed layered on the risks and caution thick, but didn’t come up with any sweeteners for the market in the shape of more easing.

The US dollar roared back, gold tanked, and stocks are wobbling after minutes from the Federal Reserve’s July meeting left investors a little disappointed. Members clearly backed away from yield curve control and seemed to be in less of a hurry to push for clearer forward guidance.

‘With regard to the outlook for monetary policy beyond this meeting, a number of participants noted that providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point,” the minutes said. This use of the phrase ‘at some point’ indicated members are not in a rush to tie rate hikes to specific economic goals. The Fed also noted that most members judged yield curve control ‘would likely provide only modest benefits in the current environment’.

The FOMC meets again in mid-September and will be reviewing the recent economic progress. For now it seems the Fed doesn’t feel the need to go quickly on more explicit forward guidance as the economy is still ‘in’ the pandemic – as long as cases rage we know what the Fed will do. The question comes on the exit – how quickly does the economy need to recover into the autumn for the Fed to feel the need to tie tightening to specific economic goals – the purpose of which would be to keep markets on an even keel.

Equities trip on FOMC minutes

The S&P 500 flirted with 3,400 in the early part of Wednesday’s session but shot 50pts lower after the minutes were released, ending down 0.44% to 3,374.85. The Dow and Nasdaq both tripped up as well. Asian markets fell overnight. European equity indices are taking their cue from this weak handover and dropped over 1% in early trade, before stocks pulled off the lows after China’s ministry of commerce said this morning that US-China trade talks would resume in the coming days. Vix futures are still pointing to increased volatility as we head towards the US election in November.

Apple hits $2tn market cap

Apple advanced to a new record high and became the world’s first $2tn company as it rose above $467 but closed flat at $462.83. There is a lot going on here – some of which is driven by Apple’s business and some of which is due to external factors. Apple has created a brand with immense power, and investors have really bought into the pivot towards Services to generate more sustainable revenues than being a pure play hardware manufacturer.

The upcoming rollout of 5G iPhones is a prime factor, as is its very strong balance sheet. I also think we could throw in the upcoming stock split as a factor as despite the fact it ought not to matter to the share price, it will undoubtedly make it easier for retail investors – a growing crop of US day traders – to buy the shares. Cf Tesla. And it’s a Covid-winner – the thirst for high quality growth has been well documented.

Dollar up, Brexit headline risks could weigh on sterling

The dollar caught a strong bid after the minutes. EURUSD fell from 1.1940 to 1.1840 where it has found support and is pushing off this level to pare some of the losses this morning. Cable also shipped two big figures in the last day and is now under 1.31 with near-term horizontal support at 1.3050. Brexit headline risks remain as trade talks continue this week – update coming tomorrow but we could get wire reports to knock the stuffing out of sterling. Overall if this is a cyclical dollar bear market then we would see this as a temporary blip.

Delivery Hero – a beneficiary of an increase in orders due to the pandemic – has been named the replacement for the disastrous, scandal ridden Wirecard on the DAX. The food delivery company will join the German blue-chip index on Monday. Delivery Hero is on course to deliver one billion orders this year, thanks in large part to the lockdowns.

Another sub-1m print for US jobless figures?

US initial jobless claims today are expected to come in under 1m again, with continuing claims at 15m. Last week’s report showed jobless claims fell under 1m for the first time since the pandemic, but unemployment levels remain exceptionally high and the concern is that temporary layoffs become permanent. The rate of change is not going to improve – the easy wins are behind us and the hard slog lies in front.

EIA crude oil inventories showed a draw of 1.6m barrels last week, while gasoline stocks declined by 3.3m barrels. WTI crude prices nudged up to $43.20 before pulling back as risk assets came under pressure from the Fed minutes. Copper prices broke above $3 for the first time in over two years but failed to sustain the move after the minutes and pared gains.

Tomorrow morning watch for Eurozone PMIs (ignore) and UK retail sales. Sales rebounded 13.9% in June after May’s 12.3% jump, which almost took total sales back to where they were before the pandemic. We know however that these masks huge shifts in how people spend their money. We also know that when furlough schemes end and we get a real increase in unemployment, people will be tightening their belts.