Stock Market Reaction ‘More Ambiguous’ Than Bonds to Fed Meeting
Stock Market Reaction ‘More Ambiguous’ Than Bonds to Fed Meeting
(Bloomberg) -- The stock market reaction to the latest Federal Reserve missive seems to be a clear case of sometimes it’s better to travel than arrive.
After trading on tenterhooks all week, the S&P 500 Index rose just 0.3% after the Fed signaled it was ready to lower interest rates for the first time in 11 years. All the action was in the bond and currency markets, where the yield on the U.S. two-year note fell by over 12 basis points to 1.74% Wednesday and the Bloomberg Dollar Spot Index declined 0.4%.
“The virtual confirmation of a cut in July drove bond yields to fresh lows, but for shares the signal is more ambiguous,” said Michael McCarthy, chief market strategist at CMC Markets. While lower interest rates boost the investment case for equities, growth concerns -- which is the reason for the Fed’s accommodative stance -- undermine the fundamental business case, he added.
The muted reaction continued in Asia -- at least outside of China: Japan’s Topix index gained 0.3% as did Australia’s S&P/ASX 200 Index. The dollar continued its slide and 10-year Treasury yields fell below 2%. Stocks saw the biggest gains in Shanghai and Hong Kong as investors adjusted positions before next week’s FTSE Russell index adjustment.
Next Up
With the Fed out of the way, it’s clear that U.S. President Donald Trump’s meeting with China’s Xi Jinping next week at the G-20 summit is what’s on top of everyone’s mind. Trump’s tweet that the pair will hold an “extended” meeting gave a boost to global shares earlier this week.
“Trump and Xi’s meeting is the next hurdle here,” said Kyle Rodda, analyst at IG Markets Ltd. “We are in ‘early January’ mode here, where markets at least want an end to uncertainty, and at the very least, the illusion of amicability and constructive dialogue between both sides,” he said.
Still, markets are pricing in just a 20% chance of a deal, according to a Goldman Sachs Group Inc. note Thursday. That’s down from 80% in April, strategists including Kinger Lau wrote.
Earnings Yearning
Outside the Fed and trade, there’s also the upcoming earnings reporting season that kicks off next month. Investors will be closely eyeing company forecasts on how and whether profits have been impacted by the trade war and growth concerns. And investors remain on economy watch.
“Beyond the G20, we’re looking for any signs of recovery in the corporate outlook and stability in the business surveys such as the PMIs within Asia,” said Kerry Craig, global market strategist at JPMorgan Asset Management. “The strength of the consumer in supporting economic growth and the tightness in labour markets has been a beacon of light against the stormy trade seas. Should the consumption outlook be challenged, recession fears could resurface.”
Last but not least is geopolitical concerns. With Brexit hanging over the U.K., sabre-rattling in the Middle East and policy decisions due from OPEC, there is a lot going on with the potential of impacting global stock markets.
Fed Positive
Still, others are looking on the bright side.
“In our view, the Fed’s stance is a positive for housing, equities, and leverage as rates will likely stay low for longer,” said Wells Fargo Securities’ head of equity strategy Christopher Harvey in a report. “While there is plenty of uncertainty in the world, the historically low funding costs could spur additional shareholder-friendly activity and potentially M&A.”
--With assistance from Cormac Mullen and Joanna Ossinger.
To contact the reporter on this story: Divya Balji in Singapore at dbalji1@bloomberg.net
To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net, Cormac Mullen, Joanna Ossinger
©2019 Bloomberg L.P.