Risk ON ahead of key central bank meetings

Risk remained on the menu this morning after strong Chinese retail sales and industrial production numbers overnight raised hopes the world’s second largest economy is accelerating out of the coronavirus slump.

As well as Chinese data, sentiment towards risk continues to remain generally positive thanks largely to ongoing central bank largess. At the time of writing, European stock indices and US futures were higher, along with commodities and risk-sensitive FX pairs.

Fed, BoJ and BoE in focus

Investors are awaiting the outcome of three major central bank meetings this week, namely the Federal Reserve, Bank of Japan and Bank of England, to gauge the outlook for the global economy and financial markets. It all boils down to how dovish these central banks are going to be compared to expectations:
  • The Fed is undoubtedly going to maintain a dovish stance after it decided to shift to inflation targeting, suggesting a temporary rise in price levels will be tolerated in the future. The US central bank will be wary of uncertainty the US presidential election will bring with and wouldn’t want to cause unnecessary turmoil in the financial markets.
  • Likewise, the BoJ will be cautious given that the pandemic is still a major issue for the global economy, on which the export-oriented Japanese economy relies heavily on.
  • For the BoE, the possibility of a no-deal Brexit means the outlook for the UK economy is extra uncertain. So it is safe to assume the Bank of England won’t be tightening its belt any time soon. Quite the contrary, in fact, as the BoE is likely to increase its monetary stimulus later this year and could potentially use Thursday’s meeting to lay the groundwork for that.
Against this backdrop, these central banks will very likely convey a dovish message to the markets, which should mean higher stock and gold prices, everything else being equal.
Indeed, gold, silver and copper prices have all extended their gains today as investors price in the prospects of low rates for longer from the Fed and other banks. Meanwhile the stronger Chinese data has also raised hopes over strengthening demand for industrial materials.
Brexit and virus uncertainties weigh on UK economy

Thanks to today’s “risk-on” trade, the pound was holding its own relatively well, too, although it has not made much progress on the upside so far this week. As mentioned, investors remain cautious ahead of Bank of England’s policy decision on Thursday, when the central bank is very likely to maintain a dovish outlook as Brexit- and virus-related uncertainties weigh on economic recovery.

Indeed, this morning’s domestic data revealed the UK jobs markets took a turn for the worse in July as total job losses during the pandemic climbed to almost 700,000 as employment fell by 102,000. The data raises pressure on the government to extend its wage support as furloughs end next month. The Chancellor has so far resisted the pressure and this has raised fears we will see a dramatic spike in unemployment in October when government aid expires.
Chinese recovery taking shape

However, for the wider markets, it was the overnight release of Chinese data that helped to boost sentiment causing the offshore yuan to climb to its highest level in a year. Retail sales rose for the first time this year, coming in at +0.5% year-over-year in August when a flat reading was expected. Industrial production expanded 5.6% y/y from 4.8% the previous month, beating expectations of 5.1% and boosting investor appetite for industrial materials like copper and silver.