Bassanese Bites: Sell the fact – September 21 2020

Global markets

The correction in global equities continued last week given the latest Fed meeting offered nothing new and U.S. economic data disappointed somewhat. Bonds yields were steady while the $US eased a bit further.

Although the Fed confirmed it has moved to a new framework which will tolerate inflation at greater than 2% (if it ever happened) for some time – supported by projections of the Fed funds rate not budging for three years – the market knew all this already, making it a case of ‘buy the rumour, sell the fact’. Reflecting this reality, however, other central banks are starting to worry about undue strength in their currencies, with the Bank of England opening the door to potential negative interest rates and ECB officials noting they are ‘monitoring’ the euro. In other words, the global currency war continues, which is likely to keep short rates around the world at rock bottom levels for some time – and seems likely to force the RBA to cut the official cash rate to 0.1% before too much longer.

Meanwhile, U.S. weekly jobless claims fell a little bit less than expected and August retail sales were not as robust as hoped. All up, the picture emerging is that while the U.S. economy continues to recover – and so far at a faster than expected pace – there are growing signs of a tapering in the growth momentum, and with as yet few signs of urgency from policymakers to provide much more stimulus.

While markets are impatient, to my mind some slowing in U.S. growth after the initial re-opening rebound was always to be expected, and markets need to get used to the fact sugar hits of more stimulus announcements will get rarer from here. Indeed, more stimulus is simply not needed, with growing signs that the U.S. along with most other developed economies are learning to live with the virus – without a return to draconian lockdowns – until such time as a vaccine becomes available. As seen in the charts below, the much lower death rates during the current second wave of COVID cases are helping keep economies open so far.

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