(29 JULY 2020)DAILY MARKET BRIEF 1:Equities lack direction before Fed decision

Asian trading session lacked a clear direction, after mixed European and bearish US trading.

Chinese stocks (+1.05%) rose following a soft start, while Japanese equities (-1.02%) edged lower as Fitch revised the country’s sovereign debt rating outlook from stable to negative.

US and European equities slid, treasuries gained, and the US dollar index steadied above the 93 mark before the Federal Reserve (Fed) decision announcement.

The Fed is not expected to bring any significant changes to its policy stance at this month’s meeting. US policymakers will likely emphasize the lingering risks on the US economy and maintain an ultra-supportive monetary policy to provide support to its economy ravaged by the pandemic. While investors will continue looking for clues regarding alternative policy tools, including the yield curve control, we do not expect to hear any material progress before September. While there is little room left for enhanced forward guidance, the Fed will follow a clear strategy to support lending and liquidity. The market already digested the Fed’s endeavour to keep the short-term rates low for long. Combined with a solid fiscal support, the Fed won’t move more dovish on its policy for now.

Speaking of the fiscal support, the Republicans released their additional fiscal stimulus proposal. Nomura analysts expect a final package of around 1.5 to 2 trillion US dollar to pass within the next two weeks. The US has already spent $2.8 trillion to tackle the negative implications of the Covid crisis. The mounting US debt isn’t reflected in the US treasury yields, in contrary, the US 10-year yield remains below the 0.60% mark before the Fed decision. But the US dollar suffers from the skyrocketing government debt and mounting stagflation worries in the US. This being said, 60% of the world’s currency reserves are held in US dollars, meaning that the greenback won’t lose its reign anytime soon.

Meanwhile, the US earnings continue coming in. So far, the second quarter results have beaten the analyst expectations by 15%. This doesn’t mean that the US companies did well during the pandemic, it only means that they did better than analyst expectations. But since the beginning of the US-China trade war in 2018, the earnings expectations tend to be systematically lower than the actual results, which in turn result in an abnormal positive push in US stock prices and enhance the decoupling between the market and the company fundamentals.