Tough Stimulus Talks Weigh On Markets, Dovish Fed Might Help

• Dollar finds support from stalled stimulus talks amid splits in Congress
• Stocks struggle on poor earnings, stimulus delay; gold pauses rally
• Fed might bring some cheer if it reinforces dovish message

Fiscal cliff worries mount as talks drag on

Fears that the United States could be headed for a fiscal cliff undermined investor sentiment on Wednesday as Congress was no closer to reaching a deal on a new virus relief bill. An agreement before the month-end deadline is looking increasingly unlikely as the $1 trillion package proposed by the Senate Republicans has not only come under fire from the Democrats for being too limited, but many within the GOP are strongly opposed to any additional handouts to American households.

The proposed legislation suffered a further blow as President Trump himself appears unimpressed with his party’s efforts, calling it “semi-irrelevant”.

The prospect of long-drawn-out negotiations to reach a deal hanged over Wall Street yesterday, which already had to digest a plethora of earnings releases. The souring mood helped the battered US dollar to stabilize and the yen also made advances, while gold reversed an earlier dip to end the day higher.

Gold and dollar set sights on Fed’s forward guidance

The precious metal has settled around the $1,955/oz area after a rollercoaster ride on Tuesday that briefly sent it to a new all-time high above $1,980/oz. The hiccup with the US stimulus bill and some uncertainty ahead of the FOMC policy decision may have pressed the pause button on gold but there’s little doubt that both Congress and the Federal Reserve will eventually step up to the plate.

This can only mean more gains for the bullion as yields are kept depressed. However, in the immediate term, the Fed meeting may pose an upside risk for the dollar, and in turn a downside one for gold if policymakers don’t go far enough in reassuring markets about a long period of easy policy.

The Fed is widely expected to leave all its key tools unchanged when it announces its decision at 18:00 GMT. It already confirmed yesterday in a statement that it will extend its emergency lending programmes by three months until the end of the year. So all the focus today will be on the forward guidance and whether the Fed has any intentions to accelerate its bond purchases now that the US recovery is on shaky ground.

Virus risks persist but dollar in firing line again

While there are signs that the infection rate in the US is slowing, many states are experiencing a record number of deaths, which makes it unlikely that the lockdown restrictions that were recently re-imposed will be relaxed anytime soon, or at least substantially. And all this appears to be hurting consumption as the US consumer confidence index fell back in July, having only picked up in June.

The virus picture isn’t that much better elsewhere, with Australia and Japan continuing to see a surge and there are warnings of a second wave in Europe as well. The worrying signs bolstered the safe-haven yen yesterday, and although it was broadly softer today, dollar/yen was an exception as the pair hit a 4½-month low, slipping below the 105 level.

The euro attempted to recoup Tuesday’s losses and the pound and aussie also gained momentum at the start of European trading to reach fresh highs as dollar selling resumed.

Nasdaq wobbles as big tech CEOs face US lawmakers

European and US stock futures moved higher today after a mixed session in Asia. Although disappointing earnings from the likes of McDonald’s yesterday were a drag on the Dow Jones, it was the Nasdaq that took the biggest beating, falling by 1.3%, as tech stocks came under pressure ahead of today’s antitrust hearing in Congress.

Big tech companies have been under scrutiny for some time about their business practices and for stifling competition. The CEOs of Amazon.com, Apple, Facebook and Alphabet will testify before lawmakers ahead of their earnings call tomorrow when they report their results.

But with Congress as divided as ever, tough questioning may not necessarily lead to tough action and the real test for Wall Street will probably be tomorrow’s earnings overload as it is those stocks that have been the real drivers of the rally.