Equity investors still don't trust this rally

 The dovish tone Central Banks are setting continued as the Federal Reserve meeting lived up to expectations removing the word “patience” from the official policy statement, helping push the S&P 500 back into record territory. This rally continues in the face of economic data suggesting sluggish growth.  The latest Philly Fed manufacturing report falling to a four-month low. The upcoming G20 jamboree, in which investors now hope some clearer understanding will come between Trump and Xi over the trade dispute, also helping sentiment. The heightened tensions in the Middle East, leading to a near 10% rise from low to high this week in the oil price had little impact on equity markets. The renewed dovish stance central banks have led to a modest steeping of the US yield curve this month. Although the three month to ten year remains inverted, not to the degree, it did at the start of the month. The US dollar has continued to weaken, helping boost risk assets. There are now over 12 trillion dollars of negative yielding assets in the world.  The yield on German government bonds with maturities below 19 years is now negative. For savers it would appear to make more sense to stuff money under the mattress then hold those assets.

The weaker US dollar, lower bond yields and Middle East tensions continue to support the price of gold. Despite equities once again reaching record highs in the US, sentiment remains cautious as equity outflows reach record highs. That has boded well in the past for continued strength in the global equity market.

The Fed was not the only Central Bank reporting to the capital markets this week as the Bank of England cut growth estimates for the second quarter of this year. They now expect the UK economy to remain flat in the second quarter from earlier expectations of growth of 0.2%. Analysts have slowly lowered their hopes for a rate rise this year from the Bank of England irrespective of the Brexit outcome. The race may become a little tighter after some earlier hour apparent free and frank exchange of views in the Johnson household, for who may be the next prime minister.

 Looking to the week ahead of the G20 meeting towards the end will probably dominate sentiment. Other news that may also influence equity investors will be the final estimate for growth in the first quarter of the US economy. As is the case for most weeks, there will be a further host of data for the US economy, including durable goods orders, as well as data on the strength of housing. For Europe flash inflation rate and business survey.

Middle East tensions have so far had little influence on investor sentiment. However, should tensions increase, leading to further spikes in the oil price, there must come a time when equity and bond investors will take notice.

Posted on June 23, 2019 .