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In line Fed commentary boosts risk assets; Chinese ADRs halt recent declines

In line Fed commentary boosts risk assets; Chinese ADRs halt recent declines

The Federal Reserve overnight held its key Fed Funds rate. Chairman Jerome Powell indicated that the central bank had begun discussions on tapering. But the Fed chair did not offer specifics.Power said the Fed was still to make large progress in meeting its unemployment and inflation targets. The Fed aims to keep monetary policy loose till it achieves low unemployment and 2 percent inflation.

Road ahead

The Fed also said that risks to its inflation outlook were ‘tilted to the upside’. The acknowledgment comes after CPI inflation edged up 5.4 percent in its most recent reading. The Fed said that the spike, led by high energy prices, is transitory. Inflation in US has remained around or below 2 percent for the most part of the last decade. This was before it fell to 0 percent last year after the pandemic hit. The central bank did not offer commentary on how it will roll back its asset purchases. The purchases stand at $80 billion for Treasuries and $40 billion for mortgage-backed securities.The market expects the Fed to unwind mortgage-backed securities first. This is because of the recent buoyancy in the residential market. Housing starts, an indicator of new construction, stood at the third-highest last month. The highest two prints have also appeared in the past 12 months.The market is looking forward to the weekly unemployment data and Q2 GDP today. Economists expect growth to peak at around 8.5 percent, thanks to a low base.

Stock action

Stocks were mostly unchanged in the US with another day of largely positive results. Facebook posted stellar revenue and profit growth numbers. Ad spend also picked up again. But shares were down post market after it said coming quarters may not see similar growth. Apple fell despite a blowout quarter, after it changed its default privacy setting. In the new setting, users need to opt in for personalized recommendations. This will impact its earnings going forward.The positive surprises were in the form of Boeing and Ford. Both companies beat estimates, as deliveries of cars and planes picked up.Investors will also eye the $500 billion bipartisan infrastructure bill passed in Congress.Earnings today include Samsung in Asia, Credit Suisse & Airbus in Europe and Amazon & Mastercard in the US.

Other asset classes

In other markets, US yields were lower after the Fed and the US dollar fell.Chinese ADRs reversed some of their recent declines to trade up. Risk sentiment was buoyant with emerging assets gaining more than developed market assets.Sentiment over cryptocurrency remained positive with Bitcoin trading just below $40,000.Crude and gold remained flat while silver gained some ground and copper fell. Copper, considered an indicator of economic activity, has risen sharply over the past one year.One sector of Chinese assets that didn't partake in the recovery was real estate bonds. This was agencies downgraded bonds of Evergrande to junk. Evergrande was the world's biggest developer at one point.

Outlook

We expect equities to remain in good stead for the second half of the year. The downside risk to this case remains whether COVID-19 cases see a sharp rise again.

By

Kristal Advisors

June 22, 2021

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