Central Banks continue to dominate investor sentiment

Mario Draghi was the latest Central Banker to wade in with the fresh hope of added stimulus to help boost the slowing global economy and probably further underpin risk assets. His comments at the annual ECB symposium, "in the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be." Tells investors all they need to know. We shall see what the Federal Reserve and Jerome Powell has to say later on Wednesday. The probability is they will convey a message of wait and see for now, but remain prepared to act should they feel it necessary to extend the economic expansion.

 If Mario Draghi needed any confirmation of his comments, on Tuesday, the release of the latest euro area core inflation rate shows it remains well below target at 0.8%. The German ZEW survey fell sharply, indicating that corporate analysts are becoming even more bearish. Strangely, as the president has been vocal in his comments towards the Fed, that he believes that monetary policy has been too draconian recently. Mr Trump was critical of the Chairman's remarks suggesting the ECB could take rates further into negative territory. Describing this move as currency manipulation.

Equity volatility may continue to fall; in contrast bond volatility continues to climb. Suggest bond investors are preparing themselves for something of a shock to the bond market in the coming weeks. Any shock waves to the bond market could have more than a ripple effect on the equity market.

Ahead of the Fed meeting the latest Empire State Manufacturing Index recorded its largest monthly fall on record. Weakness was noted across all business areas. This report would suggest there is a further risk for upcoming Purchasing Manager surveys and Industrial Production. Some brokerage houses are suggesting this data was recorded during the uncertainty of the proposed Mexican tariffs, and therefore, there could be something of a recovery next month. As analysts continue to upgrade their recessionary expectations for the US economy, it may be noteworthy that over the past 50 years, all construction declines have led eventually to a recession.

The Australian dollar, which can be an indication of risk appetite, as the economy is so exposed to commodity demand, has been in decline since the middle of last year.

The price of oil briefly rose on Middle East tensions earlier in the week.  Despite tensions increasing as the Iranians saying they will breach their permitted levels of Uranium and the US releasing pictures of what they claim are Iranian soldiers removing undetonated bombs from tankers, leading to a thousand extra troops being deployed. The price of oil has drifted back.

Equity markets continue to dance to the tune of Central Banks it would appear as the recovery from May continued post-Mario Draghi's comments. It would appear bad news is good news for equities, for now at least. 

 

Posted on June 18, 2019 .