In this week’s earlier blog, we discussed the influence central banks can have on economic cycles and how this in turn influences stock prices. On Wednesday evening the minutes of the last meeting of the Federal Reserve were released, those hoping for a more dovish stance may have been disappointed. The consensual view from the minutes was that the Fed will remain on hold for the foreseeable future. Possibly rather optimistically the minutes expressed the panels view that fears to global growth and trade had moderated. Not sure if that would still be there view today, as this meeting was held before negotiations took a turn for the worse. Although inflation had dipped below their target of 2% the panel felt this could be transitory. Indeed, they moved up their longer-term inflation expectations. There has been an uptick in the recent data coming out of the US economy however today the US Manufacturing PMI fell to 50.6. Suggesting the US manufacturing is almost in contraction.
The ECB likewise discussed inflation concerns in the minutes from their last meeting, as the latest euro area economic leading indicators point to continued weakness in the economy. The German IFO survey which measures business conditions and sentiment fell again. Sentiment is back to where it was at the time of the euro crisis back in 2012. Unlike the Fed who appeared slightly more enthused about their economy the ECB feel concerned that the euro area is fairing worse than feared. Germany’s Deutsche Bank equity continues to decline, there must come a point when the German government will be forced to do something, despite doing so breaks EU rules. You can see all this fear reflected in the German bund market as 10-year German bund yields remain below zero. You pay the German government to lend them money for ten years!
As the European elections take place, Theresa May’s days appear to be over as members of the Conservative party are already jockeying for her role. Sterling has collapsed against the US dollar in the past few days as the possibility of the soft Brexit deal becomes more remote. The chances we have a General Election have increased as Boris Johnson looks to be the favourite to take over the Conservative party. Despite the globally stronger dollar and the renewed uncertainty around Brexit the pound remains above the 1.2usd it fell to straight after the referendum.
We live in interesting times as tensions around the globe abound. America and China crossing swords over the mobile phone carrier Huawei, with speculation that China may ban iPhones. Just part of the ongoing friction between the two countries. Two other areas with Europe and Brexit as we have discussed. Middle East tensions impacting the oil price. Not entirely surprising that equity markets took a leg lower on Thursday.