Market Weekly Review: Unexpected! Sino-US relations and the Fed's meeting minutes trigger a global market rollercoaster.
Weekly Review of Financial Markets (August 17-21): This week, global financial markets were hit by a series of major events – Sino-US trade talks remained uncertain, the Fed’s meeting minutes were unexpectedly less dovish than anticipated, the Democratic National Convention (Biden officially accepted the Democratic presidential nomination), the global pandemic situation remained severe with signs of a second wave in Europe, and Brexit negotiations between the UK and the EU made little progress… Amidst this considerable uncertainty, market trends saw sharp rises and falls: The US dollar fell to a more than two-year low of 92.13 on Tuesday, before rebounding to a high of 93.50 on Friday; spot gold prices…
Time:
2020-08-24 08:54
FX168 Finance News (Hong Kong) Financial Market Review for the week of August 17-21: This week, major events hit the global financial market—the Sino-US trade talks were uncertain, the Fed's meeting minutes were unexpectedly less dovish than expected, the Democratic National Convention (Biden officially accepted the Democratic presidential nomination), the global epidemic situation was severe, Europe showed signs of a second outbreak, and Brexit negotiations between the UK and the EU made little progress…Under the stimulus of great uncertainty, the market trend was a roller coaster of surges and plunges: The US dollar fell to its lowest level in over two years at 92.13 on Tuesday, then rebounded to 93.50 on Friday; spot gold, after rebounding to above 2000, experienced a sharp sell-off, especially on Wednesday, plummeting over $70, and falling to near 1910 on Friday, with a weekly swing of over $100; the pound's movement in the foreign exchange market was even more dramatic, with sharp rises (and falls) every day for four trading days.
Foreign Exchange Market: Due to the Fed's latest meeting minutes being less dovish than expected, dollar shorts were forced to buy dollars, causing the dollar to record its largest single-day gain since March on Wednesday; on Friday, weak Eurozone economic data, coupled with signs of a second outbreak of the epidemic in several European countries, and relatively strong US economic data, led to a sharp rebound in the dollar, reaching around 93.50; the euro generally showed a pattern of rising sharply and then falling sharply, reaching a high of 1.1965 on Tuesday, and falling significantly on Wednesday and Friday, reaching a low of 1.1754, and finally closing below 1.18. The pound's movement was even more dramatic—up 1% on Tuesday, down 1% on Wednesday, up 1% on Thursday, and down 1% on Friday, finally closing below 1.31.
Commodity Market: This week, gold fell to around 1910 and rose to around 2015, with a weekly swing of over $100. Overall, it also showed a pattern of rising sharply and then falling sharply, especially after the less dovish-than-expected Fed meeting minutes were released on Wednesday, causing gold prices to plummet by over $70. Analysts warned that the roller-coaster ride in gold prices could easily lead to a double-kill situation for both longs and shorts, and caution is needed. In terms of crude oil, the resurgence of the epidemic led to renewed lockdowns, hindering global economic recovery, and concerns about increased oil supply caused US WTI crude oil to close down over 1%, while the weekly increase was nearly 1%; Brent crude oil fell nearly 1% this week.
Fed Meeting Minutes: Unexpectedly Less Dovish Than Expected, Dollar and Gold Reverse Course
On Wednesday, local time, the Fed released the latest minutes of its monetary policy meeting. Regarding the market's widespread expectation that the Fed might announce the implementation of YCC at the September policy meeting, the Fed gave a clear explanation in the July meeting minutes: it is not necessary for now.
The minutes of the July meeting, released on August 19, showed that most people believed that YCC could only achieve very limited results under current circumstances, because the Fed's forward guidance on future interest rates is highly credible to the market, and long-term interest rates are already very low.
In the view of Michael Kushma, chief investment officer of Morgan Stanley's global fixed income department, the Fed essentially views YCC as a short-term policy tool, seemingly saying, "We don't really need it because we can achieve our goals without YCC."
Jefferies economists Aneta Markowska and Thomas Simons said in an interview with the media that the most surprising aspect of the July meeting minutes was the shift in tone surrounding the yield curve cap.
After the Fed's meeting minutes, the dollar and gold experienced a dramatic reversal: the dollar index rose strongly, briefly surpassing the 93 mark, and recorded its largest single-day gain since March. Spot gold plummeted, falling more than $70 from its daily high; spot silver fell below $27/ounce.
The founder of Circle Squared Alternative Investments said in an interview that the Fed showed no signs of creating the liquidity that gold investors hoped for. The widespread stimulus measures and low-interest-rate environment had pushed gold prices to a record high on August 7.
Analysts said that the minutes did not suggest an imminent easing of forward guidance and QE, which supported the dollar and disappointed gold bulls. Institutional analysis pointed out that overall, the Fed's meeting minutes seemed to somewhat dampen optimism about economic growth in the second half of the year, which may have caused investors to avoid risk.
By Friday, Eurozone economic data, the worsening of the epidemic in Europe, and negative factors related to the Brexit agreement between the UK and the EU, weighed on the euro and boosted the dollar, and the latest US economic data showed that the US August Markit Composite PMI preliminary value reached its highest level since February 2019.
In this regard, IHS MARKIT economist Sian Jones said: "August's data shows that the business environment in the private sector has further improved as customer demand from manufacturers and service providers has rebounded. These are all factors that boosted the dollar's accelerated rebound."
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