A picture of lower volatility flows from US Federal Reserve

Lower volatility and higher share prices after the US Federal Reserve’s July policy statement show it struck the right tone with investors.

US Federal Reserve chairman Jerome Powell delivers his July policy statement news conference virtually on Wednesday. Picture: Bloomberg

Lower volatility and higher share prices after the US Federal Reserve’s July policy statement show it struck the right tone with investors, even if the safe-haven US dollar found support after recent sharp declines.

Subsequent gains in the Australian dollar and shares on Thursday were crimped by news of a record 723 new cases of COVID-19 in Victoria, combined with what may have been the start of a month-end pullback in the US dollar against fast moving currencies including gold and silver in the past month.

The Aussie dollar fell back to US71.40¢ in Asia after hitting a 15-month high of US71.97¢.

The S&P/ASX 200 rose 0.7 per cent to 6051.1 points as gains in iron ore miners and defensive heavyweights outweighed falls in stocks exposed to travel restrictions and the lockdown of Melbourne, as well as gold miners after spot gold shied off a record high near $US2000 per ounce.

Encouragingly, the VIX index of volatility in S&P 500 futures fell to 24.1 per cent after the Federal Open Markets Committee meeting. It has closed below its 200-day moving average at 26.96 per cent for nine days straight.

Lower volatility may encourage passive and risk parity investors to buy more shares.

But S&P 500 futures dived in Asian trading as Asian stocks didn’t follow through on US gains.

 

European stocks fell, with Spain’s market breaking down from a consolidation pattern amid a worsening second-wave of coronavirus fuelled concern about renewed European outbreaks.

But while still heavily reliant on unprecedented fiscal and monetary policy stimulus, the initial reaction to the Fed meeting was encouraging considering the recent resurgence of coronavirus and the lack of additional asset policy stimulus or hints of new policies such as yield-curve control. The most important aspects of the Fed’s July policy meeting — the extension of special repo facilities and FX swap lines to ensure adequate onshore and offshore US dollar liquidity, from the September quarter of 2020 to the March quarter of 2021 — were announced ahead of the meeting, on Tuesday.

Fed chair Jerome Powell made it clear the extension of the dollar lending facilities for other central banks wasn’t a sign of market distress, but investors might worry nonetheless.

“We’ll leave them in place until we’re confident that they’re no longer needed,” he said.

“There’s nothing going on in the market right now that raises any concerns.”

Credit Suisse macro strategist, Damien Boey said: “But there must be risks that the Fed is wary of, causing it to take out these precautionary measures. Otherwise, the extensions would seem to be a token attempt to deliver more easing to back up dovish rhetoric without doing much new on the quantitative easing front.”

The FOMC statement reiterated that the Fed would keep buying assets “at least at the current pace” over coming months and Mr Powell struck a dovish tone with his comment that the Fed was “not even thinking about raising rates” and his acknowledgment that “recent labour market indicators point to a slowing in job growth, especially among smaller businesses”.

Mr Powell also pressured Congress to agree on the next Coronavirus Relief Bill.

The economic outlook was “extraordinarily uncertain” and there were signs that “the increase in virus cases and the renewed measures to control it are starting to weigh on economic activity”.

Some consumer spending measures watched by the Fed had fallen since late June and “recent labour market indicators point to a slowing in job growth, especially among smaller businesses”.

“A full recovery is unlikely until people are confident that it is safe to re-engages,” Mr Powell said in his press conference.

“There will be a need both for more support from us and for more fiscal policy.

“Even if the reopening goes well … it is still going to take a fairly long time for parts of the economy that involve lots of people getting together in close proximity (to recover). Those people are going to need support.”

US President Donald Trump said earlier that Republicans and Democrats weren’t close to resolving their differences over a stimulus package, and Congress might need to pass stopgap measures to prevent aid from running out. The Democrats have rejected the idea of passing a stimulus bill piecemeal and the Republicans want Congress to act on a comprehensive plan.