Dow Dumps Exxon and Fed Targets Inflation

Best PerformerWorst performer
Nasdaq 100Nikkei 225

The technology-laden Nasdaq 100 was the top performing U.S. index again, while the Nikkei 225 was the worst, even though it ended the week higher, on news that Prime Minister Abe, who had been in power since 2012, was going to step down. This surprising decision caught the markets off guard, which resulted in a decline in Japanese stocks.

U.S. stock markets benefited from Powell’s speech in which he confirmed market speculation that the central bank would revise its monetary policy framework in adopting “Average Inflation Targeting.” In doing so, he might have given investors more reason to pile into equities given the clear implication that interest rates will stay lower, longer. “Average Inflation Targeting” means that the Fed will allow inflation to run above 2% for a period of time before it acts to contain it, especially if it has been below 2% for an extended period of time.

The Federal Reserve Board has been trying to inflate the U.S. economy to its previously stated benchmark of 2% since the 2008 financial crisis and has been unsuccessful in achieving it. Over the past few years, there have been calls for the Fed to revise its thinking and allow inflation to exceed the 2% benchmark before taking action. The thinking is that, if authorities are willing to let the economy run hotter for longer, it might spur economic activity to the point where it can actually get to 2%.

With the type of clarity that only hindsight can provide, it is apparent that the equity markets’ sharp rebound from the March lows was aided greatly by the fact that investors seeking yield had no recourse but to buy stocks, and the Fed Chair essentially told them that this will be the case for some time to come. The takeaway for equity markets is that the Fed has made being dovish an official policy.

The DJIA made changes to its components brought on by Apple’s four-for-one stock split. Of note, Exxon Mobil, the longest-tenured Dow component and the most valuable U.S. publicly traded company as late as 2014, was dumped. So too were Pfizer Inc. (PFE) and Raytheon Technologies Corporation (RTX). The newcomers are, inc. (CRM), Amgen Inc. (AMGN), and Honeywell International Inc. (HON).

Oil, Yields, and Gold

Crude oil (WTI) ended the week up 3.19% as the combination of a fifth consecutive weekly drop in U.S. crude inventories and hurricane Laura bearing down on the U.S. Gulf Coast gave the commodity a boost. U.S. 10-year and German bund yields ended the week higher as investors sought out riskier assets in search of yield. Gold ended the week higher by 1.3% as it consolidates after the sharp rise in August.

Key Economic Events (next week)

DateTime (EST)Event
August 319:45 PM(China) Caixin Manufacturing PMI
September 0112:30 AM(Australia) RBA Monetary Policy
9:30 AM(Canada) Manufacturing PMI
10:00 AM(U.S.) ISM Manufacturing PMI
9:30 PM(Australia) GDP (quarterly)
September 028:15 AM(U.S.) ADP Non-farm Employment change
September 038:30 AM(U.S.) Unemployment Claims (weekly)
10:00 AM(U.S.) ISM Service PMI
September 048:30 AM(Canada) Employment
(U.S.) Employment

Chart(s) of Interest – NZD/USD

Chart of NZD/USD (weekly)

NZD/USD (weekly).

NZD/USD’s rise is targeting resistance zones between 0.6750 and 0.6790, which, if breached, would bring 0.6970 into focus. Support levels at 0.6488 and 0.6382 would need to be decisively pierced for bearish momentum to reassert itself.

Pivot Points and Fibonacci Retracement Levels

The pivot point is calculated from the previous trading periods’ price action and can be used to determine the short-term trend. If the instrument on the following period trades above the pivot point, it is thought to be exhibiting bullish sentiment, whereas trading below the pivot point is seen as bearish. The Fibonacci retracement is the potential reversal of the instrument’s original move in price.

Pivot points and Fibonacci retracements

Pivot points and Fibonacci retracements.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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