Indices across the board sold off today, making it the 5th session in decline as many investors and traders take high valuations as a good time to take profits.
We have seen Stocks rally in an environment where money is cheap, 1 Trillion dollars of fiscal policy for the United States is not enough, and where the Federal Reserve is buying back 120 Billion Dollars’ worth of bonds every month. Pair this influx of liquidity with many investors and traders being able to save due to lockdowns across the world, and you have yourself a buoyant asset market. And it seems like we will be living in this environment for the foreseeable future.
Chairman of the Federal Reserve Jerome Powell signaled that it would continue to keep monetary policy loose and their bond buyback scheme consistent. With that said, he signals a positive outlook for the U.S economy in 2021. A question on whether rising treasury yields signals an improving economy, Powell replied, “In a way, it’s a statement of confidence on the part of the market that we will have a robust and ultimately complete recovery.” This is interesting as an optimistic viewpoint from the Fed may signal that they may tamper accommodative policies in the near term
However, some analysts are wary about the Fed portraying too much optimism. Steve Friedman, senior macroeconomist at MacKay Shields, stated that “We’re not out of the woods yet when it comes to the virus, and the economy also remains quite far from a full recovery.”
What are you looking at in the markets?
It has been 15 days into the new year, but it feels like a year’s worth of events has already occurred. Most notably:
Strip what happened in 2020 out of the question, and this would be run a racket on the equity markets. However, it seems like nothing can scare off investors in this day in age.
Equity Markets in the United States continues to edge higher, with the Dow Jones and the S&P 500 up 0.1%, with the NASDAQ saying as is. European equities too end slightly higher, with the DAX 30 edging up 0.4%. With turmoil continuing to disrupt the world, why are investors continuing to plow money into equities?
With the Federal Reserve stating that they “are not even thinking about thinking about raising rates,” alongside the introduction of their new tool of letting inflation run higher than their mandate portrays that low yields are here for the foreseeable future. The time to raise rates “is no time soon,” Powell states.
This has forced many managers to search for yield across equity markets. However, this can’t be the only reason, as real yield has been low for the past couple of years, even before the Coronavirus. Mario Draghi, former ECB President, was known for saying that “for rates to be higher in the future, they need to be low today.”
Many companies continue to thrive even amidst the Coronavirus, notably technology firms such as Salesforce, Facebook, and Slack, alongside retailers such as Walmart and Amazon. Their current price premium reflects their ability to generate free cash flow in recessionary periods. Today, value equities in the industrial, financial, and energy sectors led the edge higher today.
The word “reflation” has recently been the buzzword as of late, providing an extra boost to equities. Scott Knapp, chief market strategist of CUNA Mutual Group, stated that “everybody acknowledges the high valuations, but most people say yes – but the stimulus?”. He further continues stating that “Markets are anticipating that reflation is under way.” Reflation may help the backbone of the US Economy, the consumer, to thrive once again and pull the US economy out of the slumps.
Motley Fool, an advocate for long-term, stock-picking mantra, believes that “time in the market, is better than timing the market,” alongside the belief that profitable businesses with high valuations should still be invested in. With a massive influx of retail investors, it would not be surprising that many of them share the same mentality.
Are you plowing your money into stocks?
Central banks, central banks, central banks. This week ahead, central bankers from all around the world will conduct their annual Jackson hole meeting in which historically they discussed the macro-environment and, of course, monetary policy. However, due to Coronavirus restrictions, they cannot meet at Jackson Hole for the first time in 40 years. Like many meetings, they will be hosting a virtual meeting, available for the public to tune into. The main focus? “Navigating the Decade Ahead: Implications for Monetary Policy” – Or put simply, Monetary policy: Coronavirus edition. Here is your week ahead.
The Coronavirus continues to ravage the United States, with no visible end in sight. Currently, the United States recorded 48,163 new cases today, with 1,013 deaths. It is an awesome sight (the literal meaning of awesome, as in awe-some) as the U.S. stock market continues to rally to new highs, and billionaires see their wealth surge. The U.S. Durable Goods Order figure measures the cost of orders received by manufacturers for durable goods, including vehicles and appliances. As these are significant investments, they provide a good bearing on U.S. consumers (buying a new car when you just got laid off is unlikely). Therefore a higher than expected figure should boost U.S. equities and the U.S. dollar. The previous print was at a 7.6% increase in the cost of durable goods purchased, with consensus to see that number rise only 3.6% this month.
With just under 40,000 confirmed cases, it is fair to say that Switzerland and many nations are continuing to grapple with the fight against the Coronavirus. However, just like with many other European countries, Switzerland is experiencing a resurgence of the virus. Switzerland recorded more than 300 new Coronavirus cases on Friday just before their quarterly update on Thursday. Analysts predict a print of -8.7% decline in GDP, from a 2.6% decline in the first quarter.
Obviously not in Jackson hole due to the Coronavirus, Central banks from all around the world will host an online meeting discussing how monetary policy will be affected in the future from the Coronavirus pandemic. For the first time in 40 years, not only will the meeting not take place at Jackson Hole, but the conference will be available for the public to watch live. Furthermore, US GDP figures alongside both Fed Chairman Jerome Powell and Governor Macklem from Bank of Canada is set to speak. There is no doubt that this will be a stormy day in the markets.
The United Kingdom continues to record new Coronavirus cases, logging over 1,041 new cases today. Investors and traders are wary of the possibility of negative rates in the future, with Deputy Governor Dave Ramsden stating that the BoE has “further headroom” to go with regards to monetary policy. The Bank of England currently holds interest rates at 0.1% and maintained its 745 Billion asset purchase target. They predict that the U.K. economy will not return to its pre-Covid levels until the end of 2021.
A big week ahead with monetary policy and forecasts from top Economists and Central bankers. Trader and Investors should be wary of the speeches ahead before placing any trades this week.
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GBP/USD falls to 1.2563 on the back of relative strength over the past 2 weeks. General risk sentiment fueled the rally. However, fears of a second wave abruptly stopped the rally.
With the recent safe haven characteristics, the USD has been exhibiting over the past, it is not surprising that the USD has been strengthening across the board. Pair this with little substantial news on Brexit, and the drop in the GBP/USD is substantiated.
Strength in the USD also came from Retail consumer data from the commerce department posting record numbers, jumping 17.7% in May – with analysts originally forecasting an 8.5% increase. This shows that the backbone of the US economy, the consumer, is again providing optimism for the US markets.
This is on the back of Jerome Powell testifying to congress that the US government will likely need to spend more money to ensure the US can reach a full economic recovery. However, he maintained a cautious stance about the economy. This may be advantageous for Trump, as he may quote Powell for being supportive of an $1 Trillion Infrastructure bill the President is trying to pass through congress.
Weakness in the GBP may be attributed to Brexit talks progressing slowly, with Prime Minister Boris Johnson saying that the EU and the UK were “not far apart” relating to the country and the Unions relationship. The Brexit saga has been ongoing since 2016, and has pushed the GBP/USD has been ranking lower since the announcement.
Traders should watch the key psychological 1.255 level, as it may provide an entry point for a reversal.
FED keeps rates unchanged at 0.25% and promises to leave rates unchanged through 2022. Furthermore, Chairman Jerome Powell stated that they would “increase treasury purchases at least at the current pace.” This supports Jerome Powell’s supportive tone in helping to recover from what he regards as the “biggest economic shock in the US, and in the world in living memory.”
The USD is mixed on the news, with US Markets generally reacting positively on the news throughout the conference. SP500 was gaining ground with the NASDAQ flirting wit hall time highs. Chairman Jerome Powell reiterates that their tools are “lending powers, not spending powers” and that “once the pandemic has passed, they will put these emergency tools back in the chest.” This is about the $120B monthly asset purchases and the US dollar swaps available to governments across the world. He firmly reiterated that the FED is not “thinking about thinking about raising rates”, confirming the likelihood that low rates is here to stay for the foreseeable future.
Jerome Powell pushed back on criticism on the effects of their purchases inflating asset prices, stating that the “purchases are accommodating financial conditions, which [he] believe is a good thing.” and that “a non-working financial system can amplify an economic shock.”
With low rates and accommodative financial, we may see an extension to the unprecedented rally in the markets, with Banks predicted to have a difficult time in generating profits in this low-interest-rate environment. However, the FED has the livelihood of Americans in check, with employment front and center and inflation “below their 2% objective”, citing “weak demand” in many pockets of the economy.
With the NASDAQ hitting all-time highs, if the FED continues to prop up the equity markets implicitly, is this a sign for you to enter the markets?
Markets brace for the week ahead as the Coronavirus continues to disrupt the world order. As the death toll has topped 300,000 worldwide, markets have shown a tentative appetite towards risk-on assets. Oil is up 7.45% the past week, with the S&P 500 down 1.58%. Gold is up 2.3%.
As Japanese residence defying lockdown rules, analysts predict a 4.6% contraction in annualized GDP growth. The government issued a $1.1 trillion fiscal stimulus package in early April, which including lowered interest rates and asset purchases. This stimulus package represents 21% of their GDP. in With an aging population and a slowing pre-coronavirus GDP growth rate, investors and traders will be looking for any positive sentiment in the report today to bolster the JPY as a safe-haven currency.
A key event to watch for traders and investors, as sentiment from the FED chairman Jerome Powell this week may affect the dollar significantly. However, he has been quite vocal in the strength in the American economy. "In the long run and even in the medium run, you wouldn't want to bet against the American economy. The American economy will recover". However, he also voiced his doubts concerns, stating that "for the economy to recover.. that may have to await the arrival of a vaccine." This is on the back of President Donald Trump stating that the Fed chair was his "Most Improved player." The Fed has implemented deep cuts to the Fed funding rate, and a unlimited quantitative easing scheme extending to bond ETFs.
The United Kingdom has one of the highest Coronavrius fatality rates in the world, currently sitting at aorund 14.3%. The government has pledged a fiscal package totaling $520 Billion, $50 Billion of which going towards employment relief. Analysts predict a 65,000 decrease in the number of people employed. This comes a day before the United Kingdom releases its Core Inflation Rate. With people being locked in their own homes, analysts predict a drop in the rate of inflation this week to 0.8%, down from 1.5% a month before.
With one of the countries not implementing a strict lockdown, Canada has done relatively well. Alongside the government's quick actions and Canadian residence adhering to a self-imposed lockdown, currently their fatality rate stands at 7.5%. Similarly to the UK, analysts predict a slight drop in the rate of inflation to -.1%, down from 0.9% a month before.