China and Hong Kong stocks opened higher after Beijing’s securities regulator convened major investment banks in attempt to ease market fears on China’s crackdown on private education crackdown – a sign that Chinese authorities have become uncomfortable with the equities rout. In Asia mid-morning, risk firmed further after headlines hit that “Chinese companies will be allowed to IPO in US” and USDCNH traded sharply lower to 6.4756 but since retraced slightly. In G10, main outperformers are NZD and CAD which gained +26bps and +31bps against the USD while AUDUSD underperformed, gaining just +5bps amidst offered USD.
Regarding the July FOMC yesterday, CitiFX Strategy notes that it was slightly hawkish relative to their and market expectations, but in line with the view of Citi’s economists by signaling that a taper announcement could come as early as the September FOMC. The major change was that the Fed in the Statement indicated that it would assess progress ‘in coming meetings’, suggesting a potential tapering announcement at the September FOMC but maintaining optionality by conditioning it on significant job growth. Additionally, the Fed repeated that it is watching upside inflation risks carefully.
Asia overnight: Sentiment in Asia was given a boost by two factors. First, while the Fed acknowledged there had been progress in the economic recovery, it continues to say that this is not enough to considering tapering asset purchases at this time. And second, the Chinese authorities said that they would continue to allow Chinese companies to list in the US. Most Asia bourses were trading higher and S&P500 futures modestly in the red at the time of writing. Risk-on trading led to the NZD and CAD out-performing the rest of the G10 in the Asian session, the AUD and USD were the underperformers, with the latter being weighed down by a spike in daily new cases of Covid.
USD: Still on the defensive The USD has been on the back-foot of late with the Fed not offering much of a relief. On the day, the focus will turn back to data with Q2 GDP scheduled to be released. Our US economist expects Q2 real GDP to advance at an 8.8% pace, accelerating from 6.4% in Q1. Both, the reopening of the economy and further stimulus should have helped growth momentum to rebound further. However, we expect Q2 to represent peak growth during the re-opening process and look for a gradual slow-down in the coming quarters. So much coupled with today’s data being mostly backward looking suggests limited market impact with bigger focus being on tomorrow’s release of June core PCE.