Bad news is good news for markets

Federal Reserve Board Chairman Jerome Powell seen in this file photo.
Federal Reserve Board Chairman Jerome Powell seen in this file photo.

By Ipek Ozkardeskaya

As expected, the Federal Reserve (Fed) maintained its dovish policy stance at this month’s meeting, as Chair Jerome Powell painted a gloomy picture of the economy, emphasizing that the global economy is faced with the most severe recession of our lifetime, that the path forward is ‘extraordinarily uncertain’ and that the most recent data points at a slower pace of recovery. Investors only heard that more stimulus is on the way.

We are back to those days where bad economic news is perceived as good news for the market as deteriorating financial conditions mean more monetary and fiscal support, a longer period of cheap liquidity which can only result in a bigger balloon in equity prices.

So, the irony is, the US GDP data should confirm near 35% slump in the second quarter and the worse GDP read on record could have a further boosting effect on US and global equities. The Dow Jones (+0.61%), the S&P500 (+1.24%) and Nasdaq (+1.35%) gained on dovish Fed, while US policymakers announced that Republicans and Democrats are not ready to agree on the next fiscal stimulus package just yet. But we believe that a $1.5-2 trillion deal will soon see the daylight.

Meanwhile, the second quarter earnings announced Wednesday were mixed, and US tech giants’ CEOs testified before the Congress on their questionable practices to eradicate competition in the sector. But the investor focus remains on these companies’ financial performances during the COVID crisis rather than the antitrust allegations in the absence of any material news that could damage profits.

Sentiment in Asia was mostly positive. Stocks in Hong Kong (+1.05%) and China (+0.50%) advanced, the ASX 200 (+0.74%) gained, while the Nikkei (-0.12%) failed to consolidate gains even with significantly better-than-expected retail sales data in June.

Oil prices remained steady near the $41 per barrel even with the announcement of a surprise 10-million-barrel slump in US oil inventories last week. There is a clear toppish sentiment in oil markets where the hesitation to carry the prices higher could trigger a retracement below the $40 pb.

Prospects of slower economic recovery and the OPEC’s hurry to trim production cuts point that the demand/supply dynamics are not supportive of further short-term gains in oil markets. The US dollar remains unloved as dovish Fed boosts inflationary pressures. The US treasury yields remain at depressed levels.

Rising inflation expectations in the US mean that even a slightest uptick in inflation would send the real yields to negative levels, if they are not there yet. As such, the zero/negative real rate environment continues giving a solid support to gold. The yellow metal sees buyers below the $1,950 per oz.

The EURUSD tests the 1.18 offers on the back of a weakening US dollar. The German GDP data is expected to reveal a 9% decline in the second quarter. Yet, given that the cataclysmic second quarter economic performance is already priced in, the worst GDP read on record should not have a significant impact on the market mood, as long as the figure remains parallel to analyst expectations.

Cable flirts with the 1.30 resistance on soft US dollar. No-deal Brexit worries could limit the sterling’s upside potential but will unlikely stop its rise against the greenback in the short term.

— The writer is senior analyst at Swissquote Bank