Markets mixed ahead of Fed decision as US lawmakers haggle

(Hong Kong) AFP: Equities fluctuated yesterday as investors kept a nervous eye on Washington this week, hoping the Federal Reserve will extend its dovish monetary policy while lawmakers are struggling to hammer out a much-needed new stimulus package.

Gold held steady after hitting record highs for two straight days, though observers say uncertainty over the spread of the coronavirus, a weaker dollar and geopolitical worries could soon push the metal above US $ 2,000.

With the COVID-19 pandemic showing little sign of being fully controlled until a vaccine is created, economic recoveries and a months-long global markets rally are sputtering, putting pressure on governments and central banks to add to their already monumental financial support.

The Federal Reserve concludes its latest policy meeting later in the day and while it is not expected to announce any new measures there are hopes it will offer new guarantees to keep the stimulus in place for an extended period.

The bank dropped interest rates to zero in the early days of the pandemic and said they will stay there until the recovery is firmly in place. It has also flooded the financial system with cash and constructed a web of loan programmes for businesses, as well as state and local governments.

“Today’s outcome is huge for risk as there is no disguising the fact that a lot is riding on the market reaction to the (policy meeting) when it comes to setting the general tone for risk sentiment over the rest of the summer,” said Stephen Innes of AxiCorp. “And it is possibly the biggest curtain-warmer to the most critical fourth quarter for stock markets ever.”
Shanghai led gainers, adding more than two percent, while Hong Kong rose 0.5 percent and Seoul gained 0.3 percent. Manila and Wellington were also higher.

But Tokyo ended more than one percent down on a stronger yen, which hurts Japanese exporters, while Fitch lowered the outlook on Japan’s sovereign credit rating to negative from stable, but kept the actual rating unchanged, following a similar move by S&P Global ratings last month.

Sydney, Singapore, Jakarta and Mumbai each lost 0.2 percent, while there were also slips in Taipei and Bangkok. London was flat, Paris rose and Frankfurt dipped at the opening.
Wall Street provided a weak lead, with traders spooked by below-par earnings from top firms, particularly McDonald’s, which saw a steep drop in profits owing to poor sales.

Analysts said world markets would struggle to build on the strong gains seen since their March bottom. “There’s enough stimulus and support in the market from a monetary policy perspective, but also from fiscal, and that keeps a nice floor under the market,” said Amanda Agati at PNC Financial Services Group.

“But we also think it’s going to be very difficult to make a lot of forward progress in this environment.”

There are concerns about US lawmakers’ struggle to push through a new support programme for the world’s top economy, with their previous multi-trillion-dollar scheme running dry. Senate Republicans have unveiled a US $ 1 trillion plan that slashes additional jobless benefits by two-thirds, but offers another US $ 1,200 payment to individuals and gives funding to schools -- provided they reopen. That is less than a third of the bill passed by House Democrats and there are worries the haggling could string out as Americans are left reeling.The need for a deal is all the more important as Congress is due to go into recess next month, but with elections less than 100 days away there is an expectation a deal will eventually materialise.

“I am not overly concerned about the alleged stall of negotiations,” said OANDA’s Jeffrey Halley. “With an election in November, neither side has an interest in being painted as the bad guy by delaying a solution. Politicians potentially losing their jobs is a strong incentive to get something done.”

The wave of cash being pumped into the system, as well as worries about the still-high US virus infection rate, has sent the dollar skidding against most other currencies and helped push safe-haven gold to record highs.