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Fed gives reassurances, equities react positively – Market Overview

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Miguel A. Rodriguez
Miguel A. Rodriguez
05 November 2022
Fed’s statements from yesterday were all in the same direction: calming the markets on their concerns about a potential inflationary rebound.

All of them agreed that the rise in consumer prices has its origin in the increase in domestic demand after a period of collapse caused by the pandemic crisis. Also, the bottlenecks in the supply chain, a consequence of the lockdown and activity closures that have occurred globally, contributed to the recent economic reports.

In short, all of them have stated that it is a transitory phenomenon that will not lead to continuous increases in consumer price levels.

This discourse has been repeated continuously over the recent weeks. Now the question is whether Fed is right, or they just have been trying to calm the markets and prevent episodes of volatility from occurring, leading to obstacles for the implementation of expansionary monetary policies, especially in fixed income markets.

For now, the market has reacted positively, and risk sentiment has improved, as reflected in the fall in prices of U.S. Treasury Bonds Yields.

Stock indices also reacted positively with widespread increases in North American futures that are already recovering much of the falls from two weeks ago. Additionally, European indices reached new highs, like the German DAX index.

The recovery expectations in Europe have also improved substantially due to the lifting of the mobility restriction measures. Today, Germany’s Ifo Business Climate for May has been published, showing a figure of 99.2, higher than expected and improving the figure for April, 96.6.

All this, although the inter-quarterly GDP figure for the first quarter, also published today, fell 1.8%, a figure that was widely anticipated by the market without impacting it significantly.

In this somewhat more optimistic scenario from today’s market, the U.S. Dollar loses strength due to the fall in long-term interest rates and the outflow of investors that use the U.S. currency as a safe haven asset in uncertain situations.

This downward movement of the dollar impacts the price of the Chinese Yuan.

The USD/CNH pair continues its downward path, reaching levels not seen since mid-2018. The Chinese authorities are allowing the revaluation of its currency against the U.S. Dollar, which has a notable impact on global markets.

The market has been waiting for some kind of intervention by the Chinese monetary authorities, slowing down the upward trend of its currency, which has not yet occurred. After the pandemic, the Asian giant’s position allows it to have a stronger currency without fear of losing competitive power. At the same time, it makes its imports of raw materials cheaper, with prices recently skyrocketing.

Sources: Bloomberg, reuters.com.

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.