Traders are practising caution today, as they aren’t ready to bet big ahead of a major event that begins today, the FOMC minutes, with the decision unfolding tomorrow. It is widely expected that the Fed will strike a dovish tone that could be positive for the U.S. stocks, but it could bring more weakness for the mighty dollar index.
At the Jackson Hole Summit, the Fed chairman, Jerome Powell, introduced a new initiative for inflation. This sent a message that the Fed is in no rush at all to alter the sailing path for its monetary policy. Lower rates are here to stay and for a longer period of time. This was the key takeaway. Investors are expecting a more dovish tone along this line tomorrow when the Fed provides more information about its new inflation policy—the average inflation. This is the reason that we have seen the dollar index paring some of its gains during the past few sessions, and currencies like Sterling, which have nothing to celebrate, have started to inch higher against the dollar.
Speaking of the Sterling, Boris Johnson, the British Prime Minister, had his victory in Parliament when the British policymakers supported him to forge forward with legislation that violates large aspects of the signed agreement with the European Union. The E.U. will sue the U.K., which means that the chances will be even slimmer for any negotiations taking place in good faith. The no-deal Brexit threat becomes real once again, and this is highly negative for the Sterling.
There is no doubt in our mind that the Euro-Sterling pair could easily reach parity, if not more, under a no-deal Brexit. Even if we have a deal, the stronger currency is likely to be Euro- at least in the short to medium term. Our base case for the EUR/GBP exchange rate remains at 0.87.
In simple terms, one may want to look at the Sterling through a bearish lens because the policymakers are only making the matter more arduous for the U.K. The more frustration Boris Johnson creates, the more irritation will occur on the European side and also within his own party. We had already seen some evidence of this when Johnson’s top lawyer for the Brexit team resigned. Thus, any bounce in sterling, which may occur against the dollar – as the FOMC is likely to be dovish – could be an opportunity to slam the currency again.
Back in the stock market, there is fear among investors and traders about the vaccine. The U.S. regulators have not given the green light for AstraZeneca’s vaccine. The company did receive the go-ahead in the U.K. over the weekend over its trial. The fact that we have not had the same result from the U.S. has had an adverse influence on the U.S. airline and hospitality sectors yesterday.
Yes, we did see all the major airlines closing in positive territory yesterday, but they have closed off their highs. There is also enormous noise in the industry about some major airlines running completely out of gas and filing for bankruptcy. While this remains a possibility, the fact is that the entire airline industry has lowered its capacity levels again. This is not good news for an already floundering industry. However, some airlines are sitting on a healthy balance sheet within the airline sector, and they only raised cash to bank on a future opportunity.
But overall, the entire airline industry is well off its highs in terms of their passenger numbers, and in turn their stock price. Therefore, in terms of risk and reward, it makes perfect sense. Perhaps the best strategy could be to diversify the risk across the U.S. and European airlines, and within each region, diversify the portfolio even more.
The U.S. futures are trading higher today but only by a slight margin. Traders are feeling confident that the economic data is continuing to improve for the second-largest economy in the world, China. The Chinese retail sales went back into growth territory, and this was the first time since the coronavirus pandemic. Retail numbers surged 0.5% year-on-year in August, and the industrial production number also saw strong gains, it advanced 5.6%.
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