US open – Stocks gaining ahead of the Fed

Cautious optimism

Stock markets are advancing cautiously on Tuesday, as investors await the outcome of this weeks central bank meetings, with particular focus on the Fed, who’s two day meeting gets underway today.

The week got off to a decent start, buoyed by a raft of headlines including vaccine news and M&A activity. Adding to this overnight was some better than expected Chinese data which has continued to lift the mood. The more inclusive gains are promising and investors may also be encouraged by the stabilization we’re seeing in the tech space.

Ultimately though, it’s the Fed meeting on Wednesday that could be the difference maker this week. The central bank modified its framework last month and this is its first opportunity to act upon it.

In allowing for an inflation overshoot, the Fed has given itself to be patient in considering tightening, when the time comes, or even ease further. With some economic data improving faster than expected, policy makers may err towards the former and monitor price pressures in the near-term.

Sterling cautiously higher after jobs report

UK unemployment rose to 4.1% in the three months to the end of July, as the pandemic continues to take its toll on the economy. This rate is still extremely low but expected to rise dramatically, with the government opting not to follow its European neighbours in extending the furlough scheme beyond the end of October.

With more than five million people temporarily out of work (which includes those furloughed) we’ll soon get an idea of the permanent damage to employment as a result of the pandemic and the decision not to extend employment support. The official data won’t be seen until the end of the year but there’ll be plenty of indicators in the interim that should give an idea of the damage.

To complicate matters further, we’re one month away from the deadline set by London and Brussels to achieve a deal and avoid adding a messy divorce to the country’s problems. The actions of the government this last week have not endeered it to their counterparts, or a number of their own MPs for that matter.

And the pound hasn’t had a great time of it either although it is seeing some reprieve at the start of the week. I’m not sure it will last much longer though, with 1.30 being a major barrier against the dollar.