The headline news last week came from the Fed’s chairman, Jerome Powell. In our update last week, we alluded to the new ‘show me’ phase of the rally in risk assets and boy did he show markets.
Within the realm of what is possible, his U-turn was about as drastic a reversal as a central bank could possibly pull off within six weeks. In December, investors may recall he said that the balance sheet runoff was on autopilot and he didn’t see that changing – a hawkish statement. On Wednesday he said that any details of balance sheet normalization can be adjusted in the light of fresh developments.
The autopilot has been switched off and markets took this very positively. Channelling the pop singer Prince, one well regarded Bloomberg columnist remarked: “this is what happens when doves cry.”
What is happening on the three topics which may drive markets over the coming months? To recap, these are trade talks, Chinese stimulus taking hold and Brexit. On trade, the US and China have not agreed a deal but the mood from the press conference, which Trump held after the trade talks last night, indicated that the two sides are getting closer to a deal. Furthermore, in a tweet Trump said: “Meetings are going well with good intent and spirit on both sides.” Talks continue next week but things appear to be heading in the right direction and markets are responding positively to this.
Turning to whether Chinese stimulus is working - the situation is less positive. Until Wednesday this week, data from China had been OK: data on the Chinese manufacturing sector came in a little better than expected, proprietary survey data from the FT showed that the Chinese consumer entered the year in good shape and freight companies reported a solid start to the year. However, investors woke up this morning to a negative surprise: the Caixin manufacturing PMI fell materially in January. This combination of data gives the impression that the Chinese economy has not bottomed yet and more stimulus and time is needed for this to happen – if it happens at all.
Tuesday saw several amendments tabled in Parliament on the topic of Brexit. The result: Theresa May was sent back to Europe by Parliament to see if she can fix the issues with the back stop. In summary, this week investors saw good news on trade and no real resolution on China data and Brexit.
Away from these three, central bank buying of gold reached its highest levels for almost half a century last year as emerging market central banks try to diversify their large holdings of dollar reserves in the face of rising global trade tensions. Whilst investors may never thought this would happen, a senior German minister has called for measures to stimulate the German economy. Fiscal easing is something the peripheral countries have lobbied for but the fiscally prudent Germans have always rebuffed the request.