Markets are trending upwards and situated not far from all-time highs, fuelled by the prospect of renewed trade talks between the US and China starting in early October. Meanwhile China’s central bank has announced a reduced rate for mandatory bank reserves as a way of stimulating cash injections into the real economy. News of a surprise 1% year-on-year dip in exports in August, coupled with a 16% contraction in exports specifically to the US, has stoked expectations of fresh stimulus, potentially including the first reduction in official interest rates in four years.
The labour market remains solid in the US, adding 130,000 jobs in August, although this was short of the 160,000 expected. The figures are hardly spectacular, thus giving the Fed a free hand to lower interest rates while thankfully not indicating that the world’s foremost economy is heading into a recession. The market-implied odds for a 25bp reduction in the benchmark rate, at the Fed’s next meeting on 18 September, stand at 92%.
In Europe, growth momentum halved to 0.2% in the second quarter relative to the first, pinned back by a contraction in the German economy and slower exports as the trade war started to bite. The outlook for Germany is hardly encouraging. Industrial production fell further in July, dipping by 0.6% month on month and 4.2% year on year and fuelling the debate on the need for some fiscal stimulus.
As of writing the trend is still positive for risk assets thanks to extra support from central banks, low-lying interest rates and slack inflation.
But investors also need to stay wary. With such high hopes, the threat of upsets is equally high. One such hope is the end of the trade war as talks are due to resume between the US and China. Another is that a no-deal Brexit will in the end not happen. Then there is the expectation that central banks will make policy ultra-loose, starting on Thursday with the ECB – from which the market expects a rate cut as well as the resumption of quantitative easing.
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