The Fed and the 2nd wave hits the stock marketCreated: 17th Jun 2020

Jay Powell’s guidance was the catalyst for the biggest stock market fall since March as he warned of a slower than expect recovery for the US economy, alongside unwelcome news of an increase in cases sparking fears of the 2nd wave of Covid infections. The USD, Stock Market and Oil very much in focus over the past week and inevitably for the week ahead. Add Brexit, Jay Powell speaking again and Japan and the UK increasing QE and it should b a big week on the financial markets.

 

In-depth analysis 

Despite the further easing of lockdown measures by the EU and UK today,  Global markets are under pressure at the start of the week.

Despite modest rebound in US markets Friday, investors remained concerned about the FED’s dire warning about growth and jobs prospects over the next 18 months and beyond.

News over the weekend that  infections in the US have increased by 25,000 have further frayed nerves with Far East markets sliding. Florida and Texas, southern states that have reopened their economies, suffered a record rise in infections.

This will start to ring alarm bells that a second spike could be on the way, or more likely, the first wave has not been allowed to end by the premature opening up of these local economies.

Its not just news from the US that unnerved investors - Authorities in China also reported a spike in infections in Beijing, the first for more than 50 days. The Chinese response  included a further lockdown in several districts in Beijing whilst mass testing was carried out on the Seafood market where it is suspected to have originated from.

Review

FTSE -379 -5.85%  DOW -1,505 -5.55% S&P500 -152 -4.78% DAX -898 -6.99%
NIKKEI -558 -2.44%

US markets finally succumbed to the inevitable with a dramatic slump in prices last Thursday following the FOMC meeting the previous day. The S&P500 index fell 6% , registering its worst fall since March, at the height of the pandemic sell off.

Markets were strangely unmoved at the time but the following day, after another poor weekly initial claims number  that registered 1.54 million initial jobless claims.

Whilst it was in line with the consensus, the market was looking for some more upbeat news. Instead the data largely underpinned the message from the FED the day before.

Jay Powell, Chairman of the FED, painted a depressing outlook for the US economy over the next two years, expecting to keep rates at a record low until at least 2022 to combat the effects of the coronavirus pandemic.

Needless to say, Trump contradicted him, having recently been praising him for cutting rates to near zero. A case of don’t shoot the messenger.

Of course it is possible that Jay Powell will still be in his job come Christmas, whereas Mr Trump may well not, if polls are to be believed.

EURUSD -0.34 -.03%  GBPUSD -1.28 -1% USDJPY -2.20 -2%

Forex markets had been gradually pricing in the prospects for a weaker USD in the wake of the cut in US rates in March, as the stock market rally helps fuel the USD sell off in the past three weeks.

The sudden risk off move last week, with shares slumping and bond prices jumping, that mood quickly changed. The USD recovered some of its recent losses and may benefit more in the short term if  the sell off in equities persists

Sterling suffered a double whammy as shockingly bad monthly GDP data undetermined Sterling ‘s recent strength versus the USD.

On Friday the ONS reported that in April, GDP collapsed in the UK by 20.4%, by far the biggest on record.

Whilst shocking it is not unexpected as the lockdown was a deliberate decision to control the covid infection rate, knowing that it was bring economic activity to a grinding halt.

This means in two months, the UK’s GDP has contracted by a quarter, have contracted by 5% the previous month.

With Brexit talks struggling and Boris Johnson seeking to inject some momentum in those talks today, the prospect for sterling, as ever, remains uncertain.

GOLD +47 +2.7%  UKOIL -2.96 -7.07%  USOIL -2.56 -6.55%

Gold shone last week, as risk off move from Thursday helped propel the metal back towards the top of its trading range.

Some of that shine has been taken off it as the USD regains some ground.

Since mid-April Gold has been trapped in a range between 1680 and 1750, a surprisingly narrow range given the current dire state of global economies and flux in equity and foreign exchange markets.

Not surprisingly oil fell in tandem with equity markets, reflecting the risk of a second wave of infections might have on oil demand. A bigger build in US inventories released on Wednesday last week also added to the bearish mood.

 

Data / events

 

Monday                                                                                                        

China               Already released industrial production numbers. Slight  weaker than expected.

No economic releases of note. Boris Johnson meeting by video link with EU commission president to fire up Brexit trade talks.

Tuesday

Japan               Bank of Japan – culmination of 2 day meeting. No change in rates but governor Kuroda is likely to clarify how aggressively the BoJ will buy longer dated JGBs with maturities over 25 years. Little impact expected

US                    Core retail sales          A pick up. At what risk to a second wave?

US                    Jay Powell testifies in the Semi-annual Monetary Policy Report before the House Financial Services Committee, in congress

 

Wednesday

UK                    CPI – Inflation data. Another fall predicted. UK inflation heading into the same problem area as the Eurozone.

US                    Jay Powell  – second day of testimony to US Congress

Thursday

UK                    MPC – BoE rate setting committee. Expect no change in rates. But speculation increasing that the Bank may cut rates below zero by November.

Likely to increase the QE program by another £100 Bln to £745 Bln

Friday

UK                    Retail sales. A modest pick up from the shocking April number. Fuel sales a big contributor. .

The easing of the lockdown may herald some more positive news this time next month.

 

 

 

 

 

Category: Podcast

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