All eyes on the Fed this week, equities rise on hope

Global equity markets faced a barrage of bad news in the past week, although that US equities managed to eke out small gains. Geopolitical risk came to the fore as Iran receive blame for attacks on two tankers in the Gulf. There was disappointing economic data from China as industrial output and investment fell short of expectations and provided further evidence of a slowdown. Hopes that a settlement may be found ahead of the G20 meeting over the trade war between China and the US are fading. All this led to more demand for bonds and yields fell again this week. The S&P 500 is once again within knocking distance of its all-time high but failed to break through the 2900 technical level. As bond yields fell demand for gold increased as the price rose.

The recent rise in large cap US equities, not reflected quite so much in the smaller cap indexes, has been driven by hopes that the Federal Reserve Open Market committee will look to add further stimulus to the US economy. These hopes based on comments by Jerome Powell the Fed would do what it took to maintain the current economic expansion. The most recent US inflation data in the form of the Consumer Price Index rose by 0.1%.  The core index likewise rose 0.1%, below expectations of 0.2%. Helping boost hopes that the Fed can cut interest rates. We will find out this week what the Fed intentions are as they meet on Tuesday and Wednesday, with the decision announced on Wednesday evening.

Despite the increased uncertainty caused by some of the negative headlines, the Vix index fell again last week. Suggesting equity investors remain confident that the low volatility enjoyed during periods of stimulus from the Fed will continue.

The Federal Reserve is not the only central banks meeting this week to decide interest rate policy. The Bank of England and the Bank of Japan all get together. No changes are expected from either to current interest rate policy. Economic headlines that will further influence investors as to the state of the global economy will be the US flash purchasing manager surveys. For the UK inflation and retail spending. 

Geopolitical risk, as we mentioned, has increased in the past few days. The price of oil has been weaker this year, mainly as a result of further inventory build-ups.  The jump on Thursday post the bombing of the tankers was shrugged off by equity markets. Should tensions in this region increase further causing further rises in oil prices, this could put additional pressure on the global economy.

Posted on June 16, 2019 .