After a week in which the Dow Jones Index had its worst day of the year falling 800 points, leading US indexes finished the week pretty much where they started. Despite that, it is easy to remain bearish. The inverting yield curve, trade wars, Brexit, slowing global economy and analysts downgrading earnings expectations, to name the most popular reasons. Investor sentiment, possibly not quite as bearish as it was in December, remains deep into fear territory.
Is it also possible to paint a more optimistic picture? Equities rallied in the US on Friday as China's National Development and Reform Commission said Friday it would add stimulus to the country's economy. The Fed has recently cut interest rates despite the US economy remaining robust. There are now expectations they could do more.
There are strong expectations that Europe will likewise add further stimulus to support its flagging economy. One hope is that the ECB will reintroduce its quantitative program, but what could they buy? There are not many German bonds left to buy, and those around are not attractive. Does the ECB want to add to a store of Italian, Greek and Spanish bonds, questionable? Corporate bonds, there are not enough in issue to make enough of a difference. What's left? Equities? It is politically difficult to do, deciding which to buy, some companies could benefit more than others. They would, however, not be the first central bank to go down this path. The Government of Hong Kong bought equities during the Asian crisis of the late '90s. The Bank of Japan has been acquiring equities in the past few years. The easiest way would be to create its own exchange-traded fund and use that as a vehicle.
The US yield curve inverting could be more a function of the moves in the European bond market, than a harbinger of doom. If the whole of the German yield curve is in negative territory, that must make yielding US bonds more attractive, maybe part explaining.
Trade war concerns continue, and there is evidence that uncertainty is having an impact on the US economy. Tensions may have eased modestly in the past week, as Trump has said he plans talks with President Xi in the coming weeks.
Looking to the week ahead, we may get more of an understanding as to what the Fed is thinking as the annual meeting of central bankers and economists takes place at Jackson Hole. We also get the minutes from the last meetings of the ECB and the Federal Reserve.
Italian politics will remain in the headlines as there is expected to be a vote of no confidence in Prime Minister Conte.