(28 AUGUST 2020)DAILY MARKET BRIEF 1:Dovish Fed backs global stock rally.

The Federal Reserve (Fed) Chair Jerome Powell brought a new policy approach on the table at yesterday’s Jackson Hole meeting, tweaking the Fed’s inflation target from 2% to ‘2% over time’ as expected. The latter change will allow the Fed to keep the interest rates low for longer and to concentrate on achieving a healthier jobs market amid the Covid pandemic wreaked havoc on businesses leaving around 14.5 million Americans jobless. The US economy contracted 31.7% during the second quarter, the worst on record, but slightly below the analyst expectations.

The PCE index, a gauge for US inflation closely monitored by the Fed, fell 1.8% in the second quarter from 1.3% printed a month earlier, hinting that the Fed’s language tweak will in fact allow a consequential overshoot in medium-term inflation. But the Fed won’t be forced to scale back its ultra-lose monetary policy as a result of a single data point. As a result, investors will watch the July PCE index today, without however worrying too much about every single uptick in inflation data.

In conclusion, Powell’s speech was dovish enough to boost appetite in US stocks. The S&P500 hit 3500, a fresh record, though trading was choppy and the index ended the session timidly up by 0.17%. The Dow gained 0.57%, as Nasdaq retreated 0.34%.

The US dollar was sold sharply during Powell’s speech, and remained depressed against the G10 majors. US treasuries remained under pressure; the US yield curve steepened as the longer maturity bonds were hit heavier due to increased inflation expectations. The US 10-year yield jumped to 077%, a level last seen in June.

Equities in Asia traded mixed. The ASX 200 (-0.70%) edged lower, as Shanghai’s Composite (+0.51%), Hang Seng (+0.87%) and Nikkei (+0.42%) benefited from a firm risk appetite following Powell’s Jackson Hole speech.

Activity in European equity futures hint at recovery following yesterday’s losses.

Gold shortly spiked past $1950 per oz, but quickly returned to its current $1900/1950 trading range. The dovish Fed and increased inflation expectations should continue giving support to the yellow metal in the medium run, yet investors are losing appetite in fresh long positions nearing the $2000 level, as the rising treasury yields increase the opportunity cost of holding gold, while the actual price levels point at a limited upside potential only.