This is what it sounds like When doves cry

Jerome Powell and the Federal Reserve maintained its dovish stance in his testimony to Congress on Wednesday, in the face of the stronger than expected employment data at the end of last week. Whether the continued pressure from the Whitehouse to maintain this stance influenced this view, we can only speculate. Donald Trump obviously wants the Fed to help prop up the US economy ahead of the election year. The S&P 500 hitting 3000 at one point before retreating somewhat. Powell’s statement was described in some media reports as the most dovish comments for over a year. A chart reproduced in this piece from the Wall Street Journals Daily Shot illustrates possibly why central banks remain prepared to stimulate the global economy.

Monetary policy around the globe remains supportive; however, company reports are reflecting the recent weakness in the global economy. BASF, a global chemicals company the latest to make investors aware that profits will be affected by the global economic slowdown.

The ECB released the minutes from their June meeting on Thursday and followed in the Federal Reserve’s footsteps, appearing open to adding further monetary stimulus to their economy.

The upcoming earnings season will be the next test for equity markets as expectations continue to be lowered by analysts. It is unusual for equity markets to remain quite so robust in the face of earnings downgrades. Rising markets and lower earnings expectations combined lead to a rise in valuations.

Geopolitical tensions remain in Iran as BP ship was impeded by Iranian vessels until British warships intervened. The price of Brent Crude has risen over 10pct in the past 30 days. Equity markets historically tend to recover any losses created by geopolitical tensions in the following months. What equity and bond prices tend not to recover from quite so swiftly is the impact on the economy a sharp rise in oil prices can have.

We have been at this point in the past few years. Monetary stimulus has saved the day; investors are betting on the continuation. With 13 trillion dollars’ worth of negative yielding assets currently in the world, there seems little alternative to that view.  

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Posted on July 11, 2019 .