10 June - update from our investment partner

  • 10th June 2020

What has happened

The strong rally of recent weeks faltered yesterday with Europe leading the sell-off but the US equity market outperforming and US Technology stocks managing to eek out another all-time high despite the souring of sentiment. It is interesting that whilst Europe and Value stocks have lagged in the rally up until a few weeks ago, when there is a shift in sentiment, US equities and Technology show more defensive qualities despite being considerably more expensive in valuation terms.

Federal Reserve meeting

All eyes today will be on the Federal Reserve and what they do regarding their core outputs. There is some debate around whether they may embark on a new quantitative easing programme today, perhaps even considering an open-ended commitment to buying bonds. There is however a strong consensus that they will strengthen their commitment to low rates in their accompanying statement. As this is a quarterly Federal Reserve meeting, we will also see the unveiling of the central bank’s economic projections, something that wasn’t released in March due to the uncertainties of the coronavirus impact. As part of this we will see the dot plot which shows expectations around interest rate levels from each of the FOMC members into the future. Whilst there may be individual outliers, we expect the median vote to advocate unchanged rates through to the end of the 2022 forecast period.

EU Recovery fund rumbles on

EU Finance ministers met via video conference yesterday as part of the annual meeting of the EIB Board of Governors. The lack of common ground on the proposed fund undoubtedly assisted the more pessimistic view amongst European investors yesterday. The German Finance Minister suggested that a €500bn target would be more realistic than the €750bn that had been suggested in the EC package. This is of course the size of the Merkel/Macron package but given this is almost inevitably going to be a mix of loans and grants it is likely to disappoint markets. Just in case you thought this means we are edging closer to a deal, the Austrian Finance Minister followed up by saying that the recovery fund’s size and shape was not acceptable to Austria.

What does Brooks Macdonald think

The Federal Reserve is likely to tweak projections at their meeting today rather than embark on new grand measures given the abundant liquidity already in the system. If however we see a surprise quantitative easing package this is likely to fuel another leg higher in financial assets.

All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.