As the climate of uncertainty looms larger monetary authorities have made no secret of the fact they are ready and willing to take action should the economic growth trend start to taper off. This in turn has fed investor confidence and enabled the financial upcycle to continue.
Ultra-dovish remarks from central bankers last week hoisted risk assets across the board despite worsening political tensions in the Middle East. Bond yields continued to head south while equities and property assets performed well and gold rose remarkably strongly.
The Fed’s monetary policy board met last week and left interest rates unchanged. At the same time it nudged up its forecast for economic growth in the US to 2% in 2020. But its finger is poised on the trigger for a rate cut should this be required. The median forecast by Fed governors is situated at ‘no change’ for this year. However, the plunge in US Treasury yields – with the 10-year marker close to 2% – is a sign that market participants expect two rate cuts in 2019.
Mario Draghi drummed in the same message with investors by detailing several instruments that the ECB could call on. For example, rates could go lower still, offset by special measures for banks, or QE could be resumed, according to the bank’s chief.
Relations between the US and Iran have become toxic. Even though airstrikes were avoided at the last minute, another raft of sanctions have been announced.
Thankfully, Donald Trump seems prepared to talk, which is reassuring. Regarding the trade spat with China, the Trump-Xi meeting at the G20 Summit in Osaka (28 and 29 June) is sustaining hopes for a positive resolution. The meeting is ‘make or break’ because if no deal is reached, extra duties will come into force on USD 300bn of Chinese exports, and five Chinese tech firms will be blacklisted by the US. The Chinese say they want to find a ‘win-win’ deal that will uphold WTO rules.
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