Another brick in the wall

All good rallies come to an end and equity markets in Europe took a bit of a bump on Wednesday as the three main bricks in the wall of worry impacted equity sentiment. On Tuesday evening Donald Trump tweeted that he was not satisfied with Chinese trade talks and the deal is too hard to get done. This is probably part of more negotiating tactics with the Chinese but was enough to rattle markets in Europe, along with some weak Purchasing Manager data. 

Markets in the US were buoyed later Wednesday, putting trade worries to the back burner, as the minutes from the Federal Reserve indicated that the members were not worried inflation could overshoot the 2% target rate. 

On Thursday the focus came back to North Korea as Trump cancelled his proposed meeting with Kim set for June 12th. It did rather feel that the love in between the two was going rather too well. 

The final brick to unnerve equity investors were some signs of contagion in Europe regarding the impact of policies from the new Italian government. As much as the rest of Europe may not approve of the desire to cut taxes and increase borrowing to stimulate the economy, it is whats needed to encourage growth in Italy. 

The Federal Reserve was not the only Central Bank to released minutes from their last meeting. The ECB is due to wind down completely their purchase bond program in September. The minutes from their last meeting seemed to portray a mixed message. On the one hand, there were concerns that growth had slowed further and risks on the rise, on the other, the members feel that the bloc’s recovery remains broad-based. The conclusion to the minutes appeared to raise the possibility that the first European rate hike could be pushed further away, to possibly this time next year.

Once again, we have seen in the past week central banker’s reluctance to apply the monetary brakes too quickly. The ECB express caution when considering when and how quickly to raise the foot from the monetary gas pedal. The minutes from the Federal Reserve also suggested that the Fed could let inflation tick above their target rate, and the Bank of England has backed away from any impending rate rises. That became even more likely after Wednesday’s inflation data, reporting that UK inflation had fallen again. 

We had what was termed the Goldilocks economy last year, modest growth, modest inflation and a continuation in near-record low-interest rate policies. The expectation remains that economic growth may have peaked but the global economy is still expanding. Monetary policy is tightening but central banks remain cautious of “mistakes” and inflation is still not an issue. Equity investors will continue to hope Goldilocks porridge will remain just right. 

Posted on May 24, 2018 .