News & Analysis

Jackson Hole Symposium: Markets Bracing for More Volatility

August 28, 2020

By Deepta Bolaky
 @DeeptaGOMarkets

The annual Jackson Hole Economic Symposium rarely goes unnoticed as is an exclusive central bank conference which fosters open discussions about global policy matters. The economic event is sponsored by the Federal Reserve of Kansas City and is closely watched by market participants.

The Symposium has the potential to spark more volatility in the financial markets.

Challenges for Monetary Policy

The Federal Reserve Bank of Kansas City will convene its 44th annual Economic Policy Symposium virtually on Aug. 27 and Aug. 28. Ten years after the financial crisis, monetary policymakers were forced to look back and assessed the challenges of normalizing monetary policies. Over the years, central banks across the globe have used both conventional and unconventional monetary policies to support their domestic economy in the face of the financial crisis.

Just when central bankers were talking about rising interest rates, a global slowing economy and escalating trade tensions have forced them to seek refuge with more earning monetary policies.

Despite steady economic growth over the years, global interest rates have not been able to return to levels seen before the financial crisis.

The Unprecedented Pandemic

A pandemic has rattled the markets since the beginning of the year and the world was plunged in various forms of lockdowns. Given the unprecedented nature of the Great Lockdown, world leaders and policymakers were faced with tough decisions trying to manage an unparalleled health and economic crisis.

The government and central banks have absorbed nearly all the shocks of the virus on the financial markets by injecting massive liquidity in the economy, keeping credit flowing and supporting their economy with huge fiscal stimulus plan among many others unconventional plans.

Investors witnessed a turbulent start to a new decade shaken by the havoc caused by the coronavirus pandemic.

Navigating the Decade Ahead: Implications for Monetary Policy

Investors will, therefore, eye the Jackson Hole Symposium like never before for key updates and guidance on the interest rates path and monetary policies. This year’s topic is even more relevant as it will explore the issues policymakers have pre-pandemic period and address how the economic challenges arising from the pandemic will impact the decade ahead.

Slow growth, low-interest rates and low inflation will likely continue to persist, which will prompt investors to monitor central bankers’ comments to gauge expectations for the near-term and long-term outlook. Fed Chair Jerome Powell’s speech on Thursday will be under microscopic scrutiny as investors look for more clues on the interest rate cutting cycle and the inflation strategy.

Stock Market

Trillions of dollars of liquidity and credit have been injected in the global economy to combat the coronavirus crisis. On the reassurance of these intervention measures, global stocks have rallied from March lows. Despite the high level of economic uncertainty, we saw new highs in the stock market fuelled by expectations of more stimulus packages and positive vaccine updates.

Global equities index practically erased all its 2020 losses on a stimulus sugar rush!


Source: Bloomberg

A Dollar-Event

The US dollar has been on a clear downtrend in the last couple of months. Earlier this month, the US dollar index which tracks the performance of the greenback against a basket of currencies reached a low of 92.12 before pushing back to the 93 levels. The US dollar initially rose as a haven currency during the pandemic because the US economy was seen flaring better than its counterparts.

The momentum quickly reversed when the US failed to successfully contain the virus. The US economy is seen as lagging behind compared to the improvement seen over the months from the rest of the world. Also, while the US Congress is yet to reconcile their differences over the next coronavirus package relief, Europe has shown rare unity on the fiscal front. The symposium will probably be the most important event for the US dollar this week.

A dovish Fed’s speech at the symposium could further weaken the dollar.


Source: Bloomberg

By Deepta Bolaky

 @DeeptaGOMarkets

Disclaimer: The articles are from GO Markets analysts, based on their independent analysis or personal experiences. Views or opinions or trading styles expressed are of their own; should not be taken as either representative of or shared by GO Markets. Advice (if any), are of a ‘general’ nature and not based on your personal objectives, financial situation or needs. You should therefore consider how appropriate the advice (if any) is to your objectives, financial situation and needs, before acting on the advice. If the advice relates to acquiring a particular financial product, you should obtain and consider the Product Disclosure Statement (PDS) and Financial Services Guide (FSG) for that product before making any decisions.

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By Deepta Bolaky
 @DeeptaGOMarket

EU Recovery Fund

After a standoff between the EU and Germany, following a critical ruling on ECB’s quantitative easing program by Germany’s constitutional court, the gradual reopening of economies of member states within the Eurozone has brought some optimism.

The downside risks for the Eurozone and its shared currency have somewhat eased on the fact that Europe, which was the epicentre of COVID-19 after China, might have gone through the worst phase of the pandemic. The sentiment for the Euro was also buoyed by the EU Recovery fund proposed by Chancellor Angela Merkel and President Emmanuel Macron to help Europe’s mostly hit countries.

Unfortunately, the optimism over the coronavirus fund proposal, which aims to show unity in overcoming the crisis and to achieve quicker economic recovery, was short-lived.

Europe’s Frugal Four 

Amid an unprecedented crisis, the Franco-German proposal was to provide support and reinforce EU financial relations and show that Europe is standing together. Austria, Denmark, the Netherlands and Sweden, dumbed as the “frugal four” put forward a counter-proposal that highlights the diversion of opinions in helping the Southern members states.

Grants or Loans

The Franco-German proposal is about “overcoming the crisis united and emerging from it stronger”. Both leaders proposed to make outright grants to help countries in need. They want to launch a temporary fund of 500 billion euro for EU budget expenditure:

“This would not provide loans, but rather budget funding for the sectors and regions hit hardest by the crisis. We firmly believe that it is both justified and necessary to now provide funding for this from the European side that we will gradually deploy across several European budgets in the future.”

In contrast, the frugal four wishes to provide loans rather than grants to southern European countries and expect the recipients of loans to comply with the fundamental principles of the EU and commit to strong reforms in repaying the loans. Their two-year and “one-off” proposal appears to also outline how those countries should use the funds and target sectors that are mostly hit based on an assessment.

The coronavirus pandemic is testing the solidarity of European members and is threatening to reawaken a euro crisis. Southern countries like Greece, Italy and Spain lacked the fiscal space they need to put forward an economic stimulus package to support their economies, compared to Northern countries. 

Disparity? Compromise?

Both proposals are saying “yes” to emergency aids to assist with recovery, but the disparity lies on how the funds will be financed to respond to the economic wreckage. The size of the emergency fund, the conditions of the funds or whether it will be grants or loans will be a compromise the markets are expecting to see. However, the type of compromise might be a key factor in determining the relationships of EU members.

Unprecedented times probably need unprecedented Unity.

Euro – The Shared Currency

The fact that Europe may have gone through the worst phase of the coronavirus has somewhat eased the downside risks of the shared currency. But the current geopolitical tensions with China and uncertainties on the EU Recovery plan are putting a lid on the upside momentum of the Euro.

After the sharp plunge in March, the EURUSD pair has been trading within the 1.08 to 1.09 range. Yesterday, the better-than-expected IFO Surveys in Germany has helped the pair to hold ground and hover around the 1.09 level. The recovery plan could mitigate the selling pressure and allow a probable move above 1.10 level if there is a compromise that satisfies the frugal four.

EURUSD

Source: Bloomberg Terminal

The immediate attention turns to the European Commission which is supposed to unveil a draft recovery plan on May 27th, 2020.

By Deepta Bolaky
 @DeeptaGOMarkets

Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice.

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