Wait and see mode in full swing ahead of a precipitous week
Australian Market Strategist
Summary: Asia equities trade mixed in wait and see mode. This ahead of a precipitous week for risk assets, with all eyes on the Fed tonight and with the Nasdaq hanging on the precipice of Aprils rising trend bellwether tech earnings Thursday, set to form directional drivers into the weeks end. Although more broadly speaking, risk assets remain resilient in the face of unfolding political gridlock, expiring additional unemployment assistance Friday and data consistent with a plateauing recovery curve.
The ASX 200 kicked off with a show of strength in this morning’s trade, despite the weak lead from Wall Street.
The morning’s charge was led higher by financials as APRA (in stark contrast with the ECB yesterday) greenlit dividend payouts, at a reduced level, for Aussie banks this year. Investor’s clearly liked the news, but we would caution confusing juicy higher yields at the offset with earnings duration/capital growth alongside sustainable dividend growth and compounding. Over an extended time horizon, the effects of a deteriorating capital base and questionable dividend trajectory will detract from portfolio returns, relative to investments in stocks that may yield less on a dividend basis at the investment offset but have the ability to sustainably maintain dividend trajectories alongside stable capital growth opportunities and earnings quality.
However, with the closure of the Queensland’s border and incremental virus clusters cropping up in Sydney’s populous suburbs the show of strength fizzled off the mornings highs with energy and materials stocks leading lower as the index succumbed to the weak overnight lead.
Consumer Confidence Dropping Off
Caution overnight spurred by the reported congressional gridlock on the next round of fiscal stimulus in the US. This as the gap between the GOP and Democrats seemingly looks difficult to bridge before August recess, and the roll off of the enhanced unemployment benefits.
The Conference Board’s consumer confidence index fell to 92.6 from 98.3, below expectations for a print of 95.0 adding to the cautious mood. Although the Present Situation Index improved, the Expectations Index fell. With large declines in Michigan, Florida, Texas and California, clearly the resurgence of the virus playing into the drop. Confidence is a key recovery dynamic, and uncertainty about the future does not bode well for the fizzling recovery. Consumers need confidence to go and spend and consume in an environment where many have lost jobs or job insecurities are running high. With pullbacks in consumption creating negative feedback loops for businesses already struggling with the fallout of the COVID induced demand shock. Without confidence, consumption driven economies will struggle as recovery curves flatten.
With the enhanced unemployment benefits set to roll off, and at best be reduced once a deal on the next relief is reached, confidence is likely set to suffer another setback. With those directly affected by the lapse in unemployment support likely pulling back on their propensity to consume immediately.
The virus resurgence and deterioration in high frequency data, alongside recent hard data prints suggesting recovery curve is flattening, with unemployment remaining high guarantees downside risks remain in place for the US economy. The fragility of the recovery and the real economy outcomes, which remain vastly different to financial markets, will keep FOMC hawks well and truly caged and ensure Chairman Powell attempts to sound as dovish as possible, whilst probably offering up very little in the form of new information.
It is likely nothing ground-breaking is offered at tonight’s presser, other than the reiterations that the Fed will stay the course in providing assistance to the economy whatever the future costs or side effects. Expansionary policy is here to stay, and that forward guidance will be reiterated. Recent Fed speak has noted a commitment to keeping interest rates near zero until inflation reaches the 2% target level, or even exceeds it, implying that rates will be anchored near zero for some time to come. However, policy changes will likely be deferred until post the Monetary Policy Review.