Fed not enough dovish. Risky assets sell-off

20.08.2020 11:37|Conotoxia Ltd Analyst Team

The stock market from Asia to the United States has seen a correction, and sentiment seems to be spoiled by the American Fed. According to the Minutes of the July FOMC meeting published yesterday, the Fed looks at the US economy with little optimism, believing that a return to the pre-pandemic situation will be long-lasting and hindered by possible further development of the epidemic.

It seems that the Fed has also not been sufficiently dovish for the markets, i.e. there was no mention of further possible monetary easing measures or yield curve control to prevent possible falls in the debt market. The lack of such assurances led to a rapid, short-term yield increase in the American debt market, which had a knock-on effect on the US dollar, it is strengthening, the drop in gold prices and the sell-off on the stock market.

The price of gold fell from over USD 2000 to about USD 1930 per ounce. The EUR/USD exchange rate went back from 1.1950 to 1.1825, while the S&P 500 index was unable to close above the historical high of February 2020, which may lead to a huge double top formation or resistance in the area of 3400 points. The Fed may also influence the quotations of emerging market currencies, including the zloty, which has weakened both to the dollar and the euro. The USD/PLN exchange rate is 3.71 this morning and the EUR/PLN exchange rate is 4.40.

The retreat from risky assets seems to be mitigated by information that the Chinese trade ministry has reported that Washington and Beijing have agreed to hold trade talks in the coming days. However, another relief package for the US economy is still unresolved, as politicians still cannot agree. The number of people infected with the coronavirus is also increasing. Worldwide, 22.4 million cases have been exceeded, of which at least 788 000 people have died. In the USA, the epicenter of the disease, the number of infections has increased by 46.4 thousand in the last 24 hours, while in Brazil there are 49.3 thousand new cases and in India a record number of 69.7 thousand. In Europe, concerns about the second wave of infections have emerged in several countries. Spain reported 6.7 thousand new infections.

Today, the European Central Bank is to publish a Minutes from the last meeting, and investors will look for guidance on the next steps of the central bank — as was the case last night with the US Fed.


Daniel Kostecki, Chief Analyst Conotoxia Ltd.

Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.

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