Risk assets rally on Powell Put

29 November, 2018

Investors were all ears for yesterday’s speech from Federal Reserve Chairman Jerome Powell at the Economic Club of New York. A couple of keywords were all that was needed to boost investor appetite that sent the Dow Jones Industrial Average 617 points higher - the strongest daily rally since March.

“Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy,” said Powell.

The term “just below” is clearly different from being “a long way from neutral” in a statement he made on October 3 when markets started falling from their peak and entered into a correction territory later that month. While it’s difficult to quantify neutral interest rates, the signal the markets got is a Fed turning dovish. While investors still believe that a December rate hike is a done deal, they now expect only one more to come in 2019 as opposed to three suggested by the Fed’s projections from September’s meeting.

Powell also believes that growth will remain solid with low unemployment and inflation near target. Such an environment accompanied by slower rate hikes should be supportive to risk, but given that markets are already pricing in a dovish Fed in 2019, we need to see improvement elsewhere to confirm that equity bulls are back in control.

The latest drop in Treasury bond yields was mainly attributed to the shift in the Fed’s outlook. This will lower the required rate of return for equity which is good news for stocks. However, if we see further drops from here, it suggests that markets are becoming more fearful of other factors, including escalating trade tensions, expectations of weaker global and domestic economic growth, slower corporate earnings growth, and geopolitical risks.

Now it’s up to Presidents Donald Trump and Xi Jinping to provide the next boost to the equities rally. A cease-fire over the weekend on the sidelines of the G20 summit to end Washington’s trade dispute with Beijing will provide much-needed support. However, it’s almost impossible to know what will go on in Trump’s mind when he meets his Chinese counterpart.


Source link  
Asian stocks ease up on risk-on mode

With Asian stocks following Wall Street lower on Thursday, the US-China trade tensions appear to have knocked the wind out of risk-on sails for now...

Dollar rebounds after US-Mexico deal

The US Dollar index (DXY) has rebounded slightly to trade around the 96.7 level at the time of writing, after the May US non-farm payrolls data came in...

Risk sentiment clipped by concerns

It is shaping up to be yet another rough, rocky and unpredictable trading week for financial markets as investors tussle with a number of different themes


Europe Parliament election results

As results from the European Parliament elections continue to trickle in at the time of writing, provisional results show pro-EU parties pushing...

Political risks keep Euro on back foot

It's been a horrid month for Theresa May, as uncertainty around the fate of the UK Prime Minister and her Brexit plans have sent the Pound plummeting...

Offshore Yuan hitting 7 top of headlines

The turn for the worst that has transpired with the unforeseen breakdown in US-China trade relations over the past two weeks has accelerated...


China strikes back on trade

Caution and growing unease sum up the atmosphere for financial markets as investors buckle up their seatbelts and prepare for more twists and turns to come...

Uncharacteristic response

It's official - President Donald Trump has raised the existing 10 percent tariff to 25 percent on $200 billion worth of Chinese goods shipped to the United States...

Anxiety hits markets on trade tensions

A sense of caution and unease lingered across financial markets today as investors grew increasingly concerned over US-China trade talks falling apart...

  


Share it on:   or