Tuesday, 25th June 2019 10:51 - by Shant
Last week was a welcome week for global stocks, with the world's premier central bank opening the door to rate cuts after bond markets had effectively forced them open weeks earlier. It was hard to ignore the bearish outlook reflected in longer end yields, and in a yield hungry market, the traditional fears do not have the same impact that investors of some 10-15 years back are familiar with. And why would they?
The Federal Reserve is not the only central bank opening itself up to further easing, with the ECB's president Draghi using the ECB Forum in Sintra to signal a readiness to add stimulus in response to the lagging economy in the Eurozone which shows no signs of recovery. This clearly proved irksome to the US president who has trade policy firmly in his line of fire, with exchange rate advantage once of his primary concerns.
Pundits have also suggested the ECB pivot was also designed to weaken the Euro, though naturally the markets have erred on the side of exposure and a long Dollar market is now vulnerable to liquidation risk. This does however feed into easier financial conditions for US corporates, as exchange rates play a larger part in the current malaise of dwindling aggregate global demand. Factor in an ever-ready Bank of Japan with its perpetual printing press and ever-increasing global 'money supply' serves to brighten the prospects for stocks, and in the US in particular - in the near term at least.
Evidently, the global headwinds reflected in collapsing bond yields further out are something which investors have protected against through defensive stocks and more traditional macro based safe havens - Fixed Income (naturally) and precious metals stand out. Stock market rotations, as well as drawdowns have also been testament to this, with FAANG stocks underperforming the broader index measures. Gold - as I have been arguing for for a number of months now - has pushed through some key levels, and looks to be - on the face of it at least - a popular hedge for equity and bond portfolio managers alike given the sharp drop off in Treasury yields. Even so, the appeal of Large-Cap stocks as confidence trade over the longer term has been a major driver more recently, with utilities and pharmaceuticals posting strong gains.
Even so, when you consider the degree of market infatuation with the dovish Fed trade, we have to once again prepare for potential disappointment in the weeks ahead. What if the US data is not as bad as feared? Is good news now set to be bad for stocks on that the Fed may have to walk back some of the market pricing, which currently stands at 75bps this year? What if 50bps are all we get? When you look at some of the data metrics as well as where we are trading in the S&P 500 and the president's beloved Dow Jones index, it is hard to conceive the urgency with which Fed easing has been pushed lately.
This delicate scenario is further complicated by the upcoming G20 meeting, where president Trump is said to have secured a lengthy meeting with his counterpart in China. While the prospect of a trade resolution is remote, and easing of tensions is possible now that the White House administration has to acknowledge that there is an impact on the US economy. Recall last week, no less than 600 companies lobbied for a swift compromise in the various trade talks. The president himself will also be keen to avoid any negative impact on the economy as he sets his sights on a second term and 2020 getting closer. Should the US ease up on their demands, then this would ultimately take some of the pressure off the Fed, who have signaled potential easing as an insurance against disruption to trade. Battling accusations of politicization, chairman Powell will again be under pressure to balance monetary policy with the real economy as well as financial markets, and at the moment, the latter seems to be pricing in a significant degree of dependency on loosening policy - deserved or not.
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.