The “J” Effect
US stocks (sector performance) saw major US indices gaining between 2% and 3% following Fed Chairman J. Powell’s speech at the Economic Club of New York where he took a dovish turn, signaling that Fed funds rates are “just below” neutral, a major a step back from his earlier comments in the fall where he implied that the FOMC still had ways to go. Expectations are now for one more rate hike in December and one last one next year. J. Powell also signaled that he saw no signs of bubbles developing in capital markets, either in stocks or elsewhere with the exception perhaps of some overvaluation in certain segments of the high yield market. He also took confidence in banks now having much more high-quality capital than before the global crisis. He also jokingly reminded as he addressed the topic of financial stability that the last time a Fed official addressed this audience was on March 18, 1929 when the Fed had issued a public statement of concern over stock market speculation as it provided guidance frowning on bank funding of such speculation. European Equity markets were closed at 6PM CET time when Fed Chair Powell delivered his speech but futures suggest only a mild positive response so far from European indices. The possibility of D. Trump imposing a 25% tariff on European cars to pay for the 16’000 workers fired at GM is a distinct risk that markets needed to integrate. Overnight, Emmanuel Macron cast blame on Donald Trump’s policies for hurting allies in Europe. Asia’s rally was also tame this morning, held back by the approaching G20. As suggested yesterday, investors have been looking for any excuse to buy by fear of missing out on a possible year-end rally. It seems that they got what they wanted (and D. Trump as well) with J. Powell sort of blinking yesterday, causing a stampede of short covering in risky assets. The important second market hurdle to overcome remains the G20 meeting. The art of the deal may still culminate with a truce or a promise for renewed negotiations and not much else. The market “needs” a deal and Trump knows it, as much as it needed the Fed to signal a more dovish inclination yesterday.
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