Trade Talks and Central Banks will Support Equities
US large capitalization stocks retraced from their all-time highs of the previous week but the Russell2000 index of small caps gained even if it remains below its all-time highs of late last year. European indices were modestly higher and the Eurodollar closed at 1.14. Healthcare company AbbieVie announced plans to buy rival Allergan for an estimated consideration of USD 63 billion.
US Fed Chair Powell surprised markets by revealing that at the FOMC meeting in May, the discussion was that growth remained solid and international headwinds relating to trade were subsiding while inflation remained close to the 2% target. In essence he was hinting that the stagflationary push was temporary and hence policy adjustment was not required. The transitory stagflation is something we highlighted in this column when he made a premature and abrupt policy U-turn in January after his December ‘fauxpas’, as opposed to letting disinflation happen naturally. The CME model of Fed Fund rates also shows that 100% of participants estimate the FED will cut interest rates on 31 July 2019.
As the rate of growth of both the US and Chinese economies is slowing, President Trump and Premier Xi used the G20 meeting to reestablish trade talks by making concessions to each other. Analysts now fear that the White House might turn its attention to the EU which is setting up a payment system to counter US sanctions on Iran as it restarts its uranium enrichment program. This has a bearing on oil prices which increased by 2% last week and could potentially affect medium term inflation if the situation escalates.
Manufacturing Purchasing Managers’ Indices released today showed a continued slowdown across geographies with German data remaining particularly soft. Hence sectoral portfolio allocations remains key in the next quarters.
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1 July 2019
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