Duncan Donald

Fri, Jun 12

Markets toil as Fed signal rates will be lower and concerns grow over a resurgence of Covid-19

Over the last few weeks, the markets have become accustomed to appreciation. With the tech heavy Nasdaq leading the charge the worries of the February and March falls have been brushed aside as not just recoveries, but all-time highs were targeted, underpinned and insured by the weight of the world's central banks stimulus measures.  It was almost looking too easy, as retail investors searched out value stocks with a keen intent to make double digit returns…and quickly!


This week brought those investors back down to earth with a bump, and as is often the case the moves were enhanced by panic. The kick start of the move came on Wednesday night with Jerome Powell delivered his scheduled monetary policy decision and statement. Whilst no change to the current status was expected and delivered, the realistic tone to the future outlook was on one hand measured and professional, but on the other not what those fear of missing out recent investors wanted to hear.


Powell’s comments also rattled the White House, with President Trump quick to criticize the realistic outlook set by the central banker he employed claiming that having access to the data he sees a more starry-eyed outlook.  With Trump building his election campaign around the success of the stock market, this came as no surprise, and as capitulation came on Thursday pushing towards but not through the circuit breaking 7% levels in most major indices he would have been seething.


It wasn’t just Powell’s caution that took the markets lower, in the last few weeks the focus had drifted away from daily Covid cases back towards economic data, with last Fridays employment data giving the impetus to test the post virus highs. However, last week as a result of holiday get-togethers and large-scale protests and gatherings across the States, we started to see a surge in cases in California, Arizona and Texas reigniting fears of a second wave and further lockdowns.


The biggest question at the moment is whether the downtrend we find ourselves in is here to stay or just simply a mild correction of a euphoric market, bringing it back to more respectable levels.  So, I stick to the theme passed over the last few weeks and believe it to be the latter.  The one constant is the stimulus, it hasn't stopped and whilst Powell was more cautionary, he still said they were armed to act if needed, and as we know, Trump is axed to get the markets up into the elections and to hell with the consequences thereafter. So, until we start to see the true impacts within and to the end of businesses caused by the lockdown and subsequent restrictions thereafter downside could well be limited. That is not saying markets can’t go lower should a significant second wave arise, but failing that, as the short term FOMO investors lick their wounds we could be at an area of value with Trump prepared to act and say anything to get his markets higher and build his ailing populism.


In the UK today’s data showed the UK economy had shrank by 20% in April, above the 17% expected. And whilst the UK remains behind the curve on emergence from lockdown, it clearly cannot come fast enough. Despite this, the Pound didn’t really see a drop, and this was perhaps because in the UK’s other pressing concern, Brexit, with minor progress was made with the UK showing slight concession to the EU over border controls on imports. Whilst not exactly a game changer it does perhaps show that they can work together. All eyes will be on the meaningful face to face discussions that will come at the end of June for 5 weeks. The Johnson administration has made it very clear that the UK will depart at the end of this year, and with questions being raised over his handling of the pandemic, he will likely adhere to the policy that had him voted in and take the UK out of the EU, with or without a deal.


The Week Ahead


Monday - Chinese Fixed Asset Investment, Industrial Production Data and Unemployment Data.  Eurozone Trade Balance, Canadian Manufacturing Sales, US Empire State Manufacturing and the Fed’s Kaplan speaks. 


Tuesday - Japanese Central Bank Interest Rate decision, German Inflation data, UK Unemployment data and Average Earnings, German ZEW Economic Sentiment, US Core and Non-Core Retail Sales, Fed’s Powell Testifies. 


Wednesday - UK CPI, RPI and PPI Inflation data. European CPI data, Canadian CPI. US Building Permits and Housing Starts. Fed’s Powell Testifies and GDP from New Zealand.


Thursday - Australian Employment and Unemployment Data, Swiss Interest Rate Decision, UK Interest Rate Decision and Statement, US Philly Fed and Weekly Unemployment and Fed’s Mester Speaks.


Friday -  Australian Retail Sales, German PPI, UK PSNB and Retail Sales, Canadian Core and Non-Core Retail Sales, US Current Account data and Fed’s Quarles speaks.