Macro round up - Could the BoE and BoC make the equity rally hit a speed bump?

Friday, 7th May 2021 12:10 - by Rajan Dhall

Another central bank has now adjusted the speed of its QE program. Just this week the Bank of England (BoE) tapered its weekly QE purchases to GBP 3.4bln from 4.4bln.

In terms of the vote, the rate decision was unanimous at 9-0 but the asset purchases vote registered at 8-1. Andy Haldane was the sole dissenter saying "downside risks were judged to have fallen". Haldane voted to reduce the stock of purchases to £825 bln.

Adding to this from the Bank of England, the Bank of Canada (BoC) announced they would scale back their purchases of government debt by a quarter to CAD 3 billion ($2.4 billion) and may have possibly upped the timetable for an interest rate increase.

What does this all mean for equities?

Well, due to the fact that "free money" has been all the rage since the financial crisis, we have seen rally in the stock markets like no other. Traders are betting that the Fed and ECB will have to follow suit at some point depending on where they are in their respective COVID-19 resurgence.

Equity indices have hit all-time highs in most nations (barring the FTSE 100) and the big question is if growth can cover the reduction of the steroids that is quantitative easing (QE). Coupled with this important question is if the world central banks will actually taper completely or just adjust the tap if and when needed.

I for one am watching Fed Chair Powell and ECB's Lagarde like a hawk (get it) waiting for clues and for any change in rhetoric. If either of them signal that there is a chance that QE will be tapered or that rates will rise fund/portfolio managers will reposition with no hesitation, possibly causing a retracement in the rally.

Looking at the daily FTSE 100 chart below, it seems that the UK's main index has started to attempt to bridge the gap. The S&P, DAX, FTSE 250 etc have all managed to trade above pre-pandemic highs but the FTSE 100 is some 8% from achieving the milestone. The strength in the pound has to some degree been a massive hindrance but the fallout from the Brexit negotiations had a role to play.

Now there has been some constant higher highs and higher lows its clear to say that the index is in a clear uptrend. Right now the area shaded in grey is a hurdle that the FTSE will need to overcome.

A positive close above the area will go a long way to please the bulls and then barring some more minor traffic it might be smooth sailing to the 7589.7 high on the chart (shaded green). Should the index fall the blue area is at the previous wave high but the stronger support comes at the 8th June high of 6511.8. The channel high may also be the catalyst for a small retracement so keep an eye out for that but for now, the bulls are clearly in charge.

Source: TradingView

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.