Market Mondays #19

Japanese PM Abe resigns, the Fed's new strategy and more...

Last week in the financial markets

· Japanese Prime Minister Shinzo Abe announced he is resigning to undergo treatment for a chronic illness, ending his run as the country’s longest-serving leader.

· Fed Chairman Jerome Powell announced the crucial strategies the Fed will take on at the Jackson Hole symposium last Thursday.

· Hurricane Laura made landfall in Louisiana and investors await the damage assessments to oil refineries.

· TikTok’s CEO quits months into the job after Trump’s ban

· Ant Group filed for an initial public offering in Hong Kong and Shanghai, making the listing even bigger than Saudi Aramco’s record $29 billion debut.

· Exxon Mobil Corp, Dow’s  longest serving member, is kicked out of the Dow Jones Industrial Average, as well as Pfizer Inc. and Raytheon Technologies, making way for Salesforce.com, Amgen Inc. and Honeywell International.

Driving forces for the week ahead

Fed’s new strategy

During the 4-day Jackson Hole symposium last week, Federal Reserve Chairman Jerome Powell outlined the bank’s new approach for implementing discretionary monetary policy to support the country’s economic recovery. 

The Fed’s new strategy entails keeping interest rates at ultra-low levels for years to come as well as its new average inflation target of 2%. This means that the central bank will be more tolerant of temporary increases in inflation above 2%, as Powell explained:

“In order to anchor longer-term inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.”

Interest rates will remain low for a long time says Powell

Some investors are skeptical, and others seek to find investment opportunities, seeing inflation-linked bonds as an increasingly attractive alternative to nominal bonds as a result. 

The Fed isn’t the only central bank under the limelight. The ECB is reviewing its own policy and this big move from the Fed may put pressure on President Lagarde to follow suit, and perhaps even implement a similar policy for the euro area. 

What else we’re reading

· Wirecard inquiry probes why Germany missed fraud of the century

· Buffett’s Berkshire wagers $6 billion on Japanese trading firms. 

· Fed’s shift is temporary boon for emerging market central banks

· Jack Ma’s Ant fuels tech IPO frenzy not seen since dot-com bubble 

· Hunger may kill more people than Covid this year

· Energy firm says its nuclear-waste fueled diamond batteries could last thousands of years

This week’s key events and data releases

Wednesday: Fed releases Beige Book, Mester to discuss US Outlook and Monetary Policy

Thursday: EU Retail Sales

Friday: UK August unemployment rate

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