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The FED, the ECB and the Bull Market

Ricardo Evangelista by Ricardo Evangelista
June 20, 2019
in Economy, Markets, Opinion, World
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On Tuesday the ECB gave signs that further easing may lie ahead, citing downside risks arising from uncertainty over the growth of the global economy. Wednesday was the Fed’s turn; removing the word ‘patient’ from their policy language and marking the intention to ‘act as appropriate, to sustain the expansion’. This is a trend that stretches beyond the two mains central banks. In recent weeks we’ve seen a clear leaning towards more dovish policies; Australia, New Zealand, India; all decided to cut rates. What is the common denominator to this wave of dovishness? The fear that trade tensions between the USA and China will impact the growth of the global economy and trigger the next recession.

If we look at the state of the American economy, it becomes clear that the fundamentals are still strong. There is some real wage growth, unemployment is almost non-existent at 3.8%, consumer confidence is high. So, why is the Fed laying the ground to announce a rate cut at the next FOMC meeting, in July? I believe it is because they are looking to engineer a soft landing. If we look back, toward the end of 2018, three rate hikes were expected in 2019. Instead, we’ve seen a complete reverse in the Federal Reserve’s monetary policy, and we are now looking at 2, potentially 3 cuts in the second half of the year – this is a powerful testament to how seriously the North American central bank is taking the dark clouds that loom in the horizon; also helped by President Trump’s Twitter nudges, of course.

But why do trade tensions pose such a threat to the growth of the global economy, to the point of being the likely trigger for the next recession? We must look beyond the exchange of finished goods between countries; today’s supply chains are intricate, raw materials, components and parts usually cross borders several times, before the final item is assembled and readied for shipping. The imposition of trade tariffs and the deterioration in International relations severely impact the confidence of businesses, to buy and invest abroad, which in turn affects price efficiencies and product availability. This will lead to a decrease in consumer buying power, job creation, etc.

So, how will the financial markets behave in such a scenario? Dovish central bank policies are likely to trigger, at least in the short term, greater appetite for risk. When interest rates are low and other easing mechanisms triggered, investors will look around for yield, which typically, can be found in stocks. it’s no coincidence that the longest running bull market in history coincided with the most prolonged period of loose monetary policy from the world’s main central banks. Stocks are likely to perform well. Just look at how the S&P 500 behaved on Wednesday, in the immediate aftermath of the Fed’s hint that more accommodative policies lie ahead – gained 0.3%! Conversely, traditional safe haven assets like gold or Japanese Yen tend to depreciate in value, as investors seek higher yields elsewhere.

 

Photo by Maja Kochanowsk.

To conclude; although the Fed and the ECB haven’t yet initiated a new cycle of easing, the writing is on the wall. Few will be surprised if the next move from both is a cut, quantitative easing or other form of stimulus. When that happens, it will very likely trigger further gains in stocks and other assets traditionally associated with risk. Therefore, even though we are living through interesting times and uncertainty is on the rise, it is likely that equities will continue to record gains. When will this bull market come to an end? Not anytime soon, according to many observers.

Tags: ecbFEDmonetary policyQErisk
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Ricardo Evangelista

Ricardo Evangelista

Has undertaken a number of senior roles in his current employer including running the international desk, responsible for managing sales, customer services and marketing functions for a number of territories, as well as acting as a regular public speaker at events and contributor to TV and other media through interviews and market analysis. Since November 2016 he has been the Senior Executive Officer (SEO) of ActivTrades Dubai branch, having overall management responsibility of the branch. Prior to joining ActivTrades Ricardo worked in the IT and Financial industries.

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Morning Brief – OPEC and Economy Sink Oil Prices

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