The Fed Is Likely To Leave Rates And Forward Guidance Unchanged
Markets.com | Jun 09, 2020 19:18
Shares on Wall Street wiped out all off 2020’s losses even as the US was officially declared in recession. The S&P 500 is now up 0.05% for the year, after rising 1.2% on Monday on what looks like a mad fear-of-missing-out trade. The broad index finished at 3,232.39 on the cash close having gained another 38 pts and is now just 160 points away from its all-time high at 3,93.52 and trades with a forward PE multiple of 23.4. In other words, unless earnings bounce back significantly faster than consensus estimates, then it’s very richly priced. It’s remarkable that equity markets can be this stretched on such a catastrophic economic contraction – but that is what unlimited Fed liquidity does.
Equity markets in Europe were lower again with investors looking ahead to the Federal Reserve two-day meeting, which starts today. Some big names in France – Airbus, Safran (PA:SAF), Thales, and Dassault turned sharply lower despite opening in the green this morning even as the French finance minister unveiled a €15bn support plan for the aerospace industry. BP (LON:BP) shares fell 1% as investors further digest the restructuring and job cuts. With its dividend yield running at 9% it will have to cut pay-outs to shareholders sooner or later. The FTSE 100 may test the 6400 support level today after dropping under the 50-hour simple moving average support, whilst the DAX is hovering around the 12,700 level, with a possible support zone found at the big 78.6% Fib level around 12,565.
European markets still seem a bit unsure whether they should follow the US with another leg higher or show some more restraint given the economic uncertainty – and the fact Europe just doesn’t have the same amount of big tech – the S&P 500 technology sector is up 11% YTD, in line with the Nasdaq 100. German trade data was weak as exports in April suffered the biggest decline in 30 years. Exports –24%, imports –16.5%. Asian markets were mixed with the ASX 200 rallying 2.44% and Chinese shares higher, whilst the Nikkei lost 0.38% as Japanese machine tool orders – an important leading indicator of manufacturing activity – fell 52.8% year-on-year last month.
So far through this equity rally we’ve seen lack of harmony between interest rates and equities. Bonds didn’t really budge even as stocks started to ramp. As we flagged last week, the bond market has started to move, albeit 10yr Treasury yields retreated off their highs yesterday ahead of the FOMC meeting. The combination of strong jobs, mortgage approvals and car sales numbers last week started to show in longer-date yields picking up. But this will not make the Fed see any reason to change its stance for now. The economic contraction in Q2 is still going to be severe, and unemployment remains exceptionally high by historic standards. The need for monetary policy to remain accommodative has not altered. And for all that the US is reopening, the WHO says the pandemic is getting worse globally.
Get The App
The Fed is likely to leave rates and forward guidance unchanged. It will also stick to unlimited QE commitment, albeit it is tapering purchases. Although there have been signs that the US economy is bouncing back quicker than expected, unemployment is expected to remain elevated through the rest of the year and beyond. Moreover, there are signs of Covid cases increasing in states which have reopened, and there is always the potential for a second wave this winter. This means the Fed will remain cautious, but it may want to signal that the next move on rates will be up and not down to quell talk of negative rates. The move in longer-dated Treasuries of late supports this view is now the market’s view.
Meanwhile, keeping an eye on capital market health, another IPO in the US got away well. Vroom, an online used car seller, raised close to $500m in its initial public offering yesterday, pricing at $22, above the previous $18-$20 range, and implying a market cap of around $2.5bn. The company will start trading on the Nasdaq today with the ticker VRM. IPO activity is down this year for very obvious reasons, but there are signs the market in the US at least is coming back to life. ZoomInfo stock has more than doubled since its IPO last week. We will be watching closely to see whether it encourages some of the larger names and ‘unicorns’ such as Airbnb, Robinhood, Instacart or Palantir to come back to the IPO table this year in spite of the pandemic.
In FX, the pound is coming off its highs to test the trend support around the 50-period moving average on the 1-hr time frame. Still sterling continues to make gains versus the dollar as the risk-on mood in markets supports cable. Having failed to secure 1.2750 bulls will need to retake this level soon to continue the thrust to 1.28 and open the road to 1.30. Immediate horizontal support at 1.2630.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.