February already? certainly feels like it

As the euro zone announced today growth for the last quarter rose at a paltry 0.2% from the previous quarter. Chinese manufacturing remains in contraction according to the latest PMI data, central bankers appear to be becoming more cautious when it comes to tightening monetary policy. On Wednesday evening the Federal Reserve had their first meeting of the year, we have added our comments ahead of the meeting in an interview we had with Jeremy Naylor on IGTV.

Later that day the Federal Reserve in the form of Jerome Powell maintained their dovish tone from the start of the year. The Fed announced that they have moved into wait and see mode whilst they discover the impact the recent weakness abroad, in other words China, and the political uncertainty has on economic growth. Jerome Powell went on to add “We think that these risks are going to be with us for a while.” The Fed also announced they will be more flexible winding down the balance sheet. The market is now predicting the path of US interest rates from here is down not up.

Two-year treasury yields fell sharply back below 2.5%, except for a small dip before Christmas, the lowest yield since May last year. The Price of gold rose as interest rates fell as did the price of corporate bonds. Equity markets rallied and the US dollar fell. Rather as we predicted.

The recent slow down had led to financial conditions easing from the start of the year and the Fed’s comments late night added to that. It would seem that, in some modest way central bankers are reintroducing the financial support to risk assets from previous years.

The MSCI World Index will finish approximately 6% higher than where it started the year. As goes the first month so goes the rest of the year. This adage did not work last year as equities had a reasonably start but a very unreasonable end. Statistical evidence suggests that there is a modest chance of the first month dictating the performance for the year ahead.

The other big swing factor for equity markets in the coming days could well be the result of the current trade negotiations between China and the US. Donald Trump was quoted that negotiations were going well but nothing will be resolved until he meets with Xi JinPing. A successful outcome and the recent comments from the Fed could help boost equity sentiment.

Posted on January 31, 2019 .