Please find below our Weekly Market Update for the week ending 20th September 2019.
Blue Sky Comment
Nothing like a bit of stimulus!
It’s all happening on the back of weaker economic data.
• The US have lowered interest rates for the 2nd time this year
• Last week the European Central Bank provided the most stimulus in 3 years
Good news in principle but equity markets have largely shrugged off this potentially good news, instead looking at the downside and why stimulus is required. Events in the Middle East haven’t helped with the bombing of the Saudi Arabia oil depots which wiped out 5% of the worlds oil reserves. This led to a huge spike in prices which hurt countries who are net importers of oil.
One of the other reasons for the weakness has been the problems that banks have had in the US in borrowing money through the repo rate. The Federal Reserve has stepped in with funding which has eased the money markets which in turn helped equities recover. It’s all about confidence!
It’s not just the Fed though that is delivering stimulus. A raft of Central Banks are indicating that they will consider easing in an attempt to stave off weaker growth. In the UK we had been talking about a possible two fold rate hike next year but the next direction of travel for the Bank of England, if Brexit uncertainty persists, is a rate cut.
Rate cutting appears to be a global phenomena with Indonesia cutting rates and the Bank of Japan holding interest rates steady at minus 0.1%, hinting at potential action in October.
Back to the US, we have the strange phenomena of interest rates being cut at the same time as we see rising inflation. Normally, rising interest rates are a tool used to control inflation. So, the question is… is this a short term phenomena or does it have longer term ramifications for the US economy and subsequently, markets?
All this stimulus looks like prolonging the global economic cycle but we have to consider the consequences. Complacency is not anyone’s friend but there are still opportunities out there.