Global equities continue to weaken after the recent strong rally. Having ended yesterday (Tuesday 9 June 2020) down 136.87 points, or 2.12%, the FTSE-100 is down a further 30 points, or 0.5%, this morning. On Wall Street, the Dow Jones closed down 300 points (1.09%), while the S&P 500 index fell 0.78%.
As we said yesterday, there is no need to panic, as the recent market rally hasn’t run its course: this is simply profit-taking, similar to wiping the frothy head from a pint of lager, ahead of the Fed’s monetary policy meeting announcement later today (7pm UK), as the market is concerned that the Fed will start unwinding its stimulus.
We believe that the recent equity market strength is fully justified because, as we have previously said, the coronavirus outbreak is a transient issue – and as a result, while we will suffer a sharp, deep and painful recession, it will also be a very short recession with a sharp acceleration on the other side of this horrible coronavirus outbreak, thanks to the extraordinary government and central bank stimulus.
Additionally, why would the Fed start to unwind its stimulus following one (albeit stunning) US employment report? As we stated yesterday, although we are starting to see economic green shoots, they are still very tender, which we believe makes it far too early to be talking about unwinding the current stimulus – especially as US unemployment is still in excess of 13% and inflation is well below the central bank’s 2% target.
Furthermore, we believe the market is ignoring the threat of deflation (which can make consumers delay purchases, resulting in slower economic growth). Consequently, we believe this will ensure the Fed, along with all central banks globally, will remain dovish (i.e. accommodating – with loose monetary policies) for the foreseeable future.
To us this was evident in today’s Chinese PPI (producer prices) data, which widened to a decline of 3.7% in May from 3.1% in April – and China is the largest trading partner for the majority of the world’s major economies, which means it is currently exporting deflation (i.e. lower prices) around the world.
As a result, we believe that during the Fed’s press conference, Jay Powell, the Fed Chair, will aim to reassure the market that their monetary policy will remain dovish, in order to ensure businesses and consumers remain confident in the economic recovery – consequently, please read or watch tomorrow’s market update for our thoughts and views.
Investment Management Team