Economics and Strategy
Dovish Central Banks Unable to Take Global Markets to New Highs
David Zervos, Jefferies Chief Market Strategist, and Chris Wood, Global Head of Equity Strategy, both believe the Fed remains inclined to cut rates, with David suggesting that Jay Powell’s post FOMC meeting press conference offered more of an assurance around a backstop than we’ve seen in previous speeches or press conferences. That said, neither Chris nor David are keen to buy the S&P at these elevated levels—David remarks that even a dovish Fed and ECB were unable to push the index to new highs.
Chris Wood believes that policy launched in the next economic downturn, particularly if it’s Modern Monetary Theory, may be the thing to actually end the 38-year bull market in bonds, but notes that while such policies have been discussed, they have not been implemented yet, meaning that it’s early to play for such an outcome.
China growth should continue to slow in the absence of a trade deal, according to Chris, and it’s unlikely that there’s an aggressive stimulus in the near term. Still, the Chinese population has been prepared for this “Long March” and sub-6% growth is unlikely to be a disaster.
The upcoming U.S. Presidential election has both Chris Wood and Ward McCarthy, Jefferies Chief Financial Economist, thinking that it will be difficult for President Trump to escalate the trade war further. The Midwest will be critical for Trump to win again in 2020—the manufacturing and farm states delivered Mr. Trump a win in 2016, but the trade war has harmed the economies in those states over the last several quarters. Ward believes that President Trump needs to deliver enough of a deal to get manufacturing going again, sufficiently ahead of the 2020 election, meaning that something needs to be done by early next year.
ECB President Mario Draghi overcame the noise and the resistance on the Governing Council and delivered an aggressive package of easing measures at the September meeting. Importantly, according to Jefferies European Economists, David Owen and Marchel Alexandrovich, QE is now open-ended, thus giving Lagarde flexibility to put her own stamp on the ECB from November 1st. Also, the ECB indicated that QE would end shortly before any future rate hikes begin. This is dovish, and suggests the ECB wants to be certain of an upturn before ending QE.
As for Brexit, a “no deal” is even less likely after the Supreme Court decision. Which means that another referendum could be the only way for the politicians to reach a (non-decision) decision and to pass the choice back to the electorate. This would still, presumably, require an amended deal to be reached with the EU and then to settle on the wording of the Referendum question(s). Those hoping that the issue of Brexit will be resolved quickly and neatly are bound to be disappointed.