Take Five: Go Virtual in Jackson Hole
LONDON (Reuters) –
1 / POWELL OCCUPIES THE (VIRTUAL) CENTER OF THE STAGE
The Fed has turned a lot in recent months: Risk assets have surged thanks to its approach of doing whatever it takes to support the economy with asset purchases and rates set at zero during the pandemic crisis.
Now a major challenge is how to boost inflation. Fed Chairman Jerome Powell could give clues Thursday on the opening day of the Jackson Hole conference, where he will discuss revising the central bank’s monetary policy framework.
The review examines how to reorganize the Fed’s tools to guide the economy. As part of this, investors have anticipated details of possible changes in the way it targets inflation.
To guard against the possibility of future price hikes, investors have stocked up on assets like gold and TIPs. Yet while five-year futures – a gauge of inflation – have risen, the measure remains below the Fed’s 2% target.
Chart: Inflation over five years over five years
2 / NATIONAL SERVICE
Chinese banks are expected to show the scars of the pandemic and the domestic economic slowdown for the first time when they release their half-year results, after countering the downtrend in the western banking sector in the first quarter.
The big five state-owned banks, including the Industrial and Commercial Bank of China (ICBC), Construction Bank of China (CCB) and Bank of China (BoC), kicked off the earnings season on August 28.
The government has put the banks into operation: Financial institutions have been asked to sacrifice 1.5 trillion yuan ($ 217 billion) in profits this year to support businesses by lowering loan rates and fees and deferring repayments loans.
Beijing wants new loans and overall funding to be higher than last year, while the banking regulator has asked lenders to increase loan loss provisions and come up with realistic profit plans. This means that profits will not increase, as the filed documents will show. – China keeps benchmark LPR lending rate stable for 4th consecutive month, in line with market – Chinese banking sector expected to have $ 490 billion in bad loans in 2020 – Xinhua –
Chart: results of the five big Chinese banks
3 / QUO VADIS, GREENBACK?
The dollar, which has slipped more than two years in recent days, looks out of favor amid negative inflation-adjusted yields, weaker macroeconomic data and tensions between Washington and Beijing. The downward movement fueled familiar discussions of the dollar’s decline as the world’s reserve currency.
Investors are trying to assess the next step for the greenback. Intraday volatility has increased in the monetary complex, suggesting that the bearish positioning against the dollar may be extreme.
And unlike July, when virtually all currencies and precious metals other than the dollar gained on the dollar’s 4% drop, August was a mixed month. The yen and the aussie struggled. Even the breathtaking rally in gold is showing signs of exhaustion after hitting a record high of nearly $ 2,100 an ounce earlier this month.
Add to that a US Federal Reserve hesitant to inject more stimulus for now as the US election looms and the greenback could find a new lease of life.
Chart: USD and CFTC positions
4 / VALUE SIRENS
Betting on a rally in so-called value stocks (read cheap) has become a popular call among sell-side analysts, as investors scramble to assess which segments of the market the rally might lift next.
Value stocks typically lag behind in the early stages of a rebound, but generally follow risky stocks on the upside as the economic recovery unfolds. Now, with the hope that a COVID-19 vaccine could be widely available in early 2021, neglected dumped stocks are becoming tempting targets for stock pickers.
A spin to value, targeting banks, autos and energy stocks has already made attempts, but the underperformance of this segment of the market for a decade means that many will not hit them with a barge pole.
Looking at the outstanding performance of value stocks and big techs since the great financial crisis in general – and the COVID-19 market in particular – investors are wary of the value trap.
5 / (BELA) RUSSIAN ROULETTE
The political crisis in Belarus continues, dragging the European Union and the United States into another proxy stalemate with Russia, the country’s main economic ally.
Street protests against the alleged vote rigging in President Alexander Lukashenko’s “landslide” electoral victory are set to continue in Minsk. With Lukashenko refusing to restart the vote and starting criminal proceedings against the opposition, it is not clear how the tensions will resolve.
For Moscow, Belarus is an important strategic buffer against NATO, and the EU and Russia sell the country’s oil at below market prices. But the relationship is strained and even the Russian currency and bonds could now be affected by the situation, especially if sanctions come into play.
Meanwhile, the hospitalization of Russian opposition politician Alexei Navalny, the biggest thorn in the Kremlin’s side, will do little to distract from Moscow, with Navalny’s allies alleging poisoning.
Chart: Belarusian bonds and ruble stumbled
Reporting by Vidya Ranganathan in Singapore, Megan Davies, Chuck Mikolajczak and Dan Burns in New York, Saikat Chatterjee, Julien Ponthus and Marc Jones in London, compiled by Karin Strohecker in London; Editing by Toby Chopra