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June 21st, 2019

Markets Lifted by the Fed

By PRATTE
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Markets Lifted by the Fed

Markets are finally enjoying good times and have accumulated several gains this week, largely due to the more accommodating tone of the Fed. Indeed, the Central Bank announced Wednesday the maintenance of its key rate in addition to announcing possible measures to support the economy. Here is what happened this week in the markets.

Please note that the blog will take a break during the summer period. We will be back in September. We take this opportunity to wish you a wonderful summer and to thank you for your loyalty.


Market Brief

It was a good day for US markets on Monday as the three leading indexes closed slightly higher. Investors, however, remained cautious throughout the session as they waited for the results of the Fed’s Monetary Committee meetings on Tuesday and Wednesday. “Investors are waiting to see what will happen with the Fed, the trend is rather restraint,” said Christopher Low of FTN Financial. Another good performance Tuesday for Wall Street who once again closed the session up, supported by the hope of a possible dialogue between China and the United States. Investors were also optimistic regarding ECB’s President Mario Draghi’s comment that “additional stimulus” will be needed if inflation continues to move away from the slightly below 2% targeted by the ECB.

The markets opened Wednesday session without direction. Investors were waiting for the outcome of the meeting of the Monetary Committee in the early afternoon. As many expected, the Fed announced the maintenance of its key rate between 2.25% and 2.50%. The Fed chairman also revealed that he now has enough arguments for a “somewhat more accommodating” monetary policy. This attitude usually boosts the markets. In addition, the Central Bank’s support measures stimulate the economy, thereby lowering yields on the bond market, making assets considered riskier, such as equities more attractive. The Dow ended the session up 38.46 points, while the S&P 500 gained 8.71 points and the NASDAQ advanced by 33.44 points.

Wall Street opened up on Thursday, encouraged by the latest comments from the Fed. The S&P 500 gained 0.9% at the open, reaching a new high, supported by the technology and energy sectors. The Dow advanced 256 points helped by Caterpillar and Exxon Mobile (+ 1.6%) and the NASDAQ was up 1.1%. This good performance continued throughout the session for Wall Street, closing sharply higher.

Markets opened down on Friday, taking a pause after a good session on Thursday.

The TSX also had a good session on Monday, finishing up 51 points. It benefited from the help of the energy sector which gained 1.5%. The Toronto Stock Index is up 11% since the beginning of the year and has not moved in parallel with oil prices this year, as prices are down 20% since April. On Tuesday, the TSX had one of its best performances since the beginning of the year, closing up 149 points. The materials sector gained 1.55% while the financial and energy sector were up. The TSX ended slightly higher Wednesday, also supported by the latest comments from the Fed. Shopify’s stock gained 6.8% allowing the sector to advance by 1.92%. The Toronto index ended Thursday’s session up 63.04 points lifted by the sectors of heavy materials and energy. The price of gold reached its highest level since September 2013 while crude oil surged.

Facebook

The company revealed this week the launch of its own cryptocurrency called the Libra. It is expected to hit the market in 2020. Libra will use blockchain technology in partnership with more than 27 companies, including Visa, Uber and Mastercard. The Libra Association, based in Geneva, Switzerland, will be independent and non-profit. It will require a minimum investment of 10 million and aims at about 100 members to join the association by its launch.

Unlike Bitcoin, Libra will be a stable, in a non-volatile system. The exchange rate will be based on the price of four traditional currencies: the US dollar, the euro, the pound sterling and the yen. Facebook will provide users with a digital wallet “Calibra” that will be available on Messenger, Instagram and What’s App and that will allow them to make transactions. This initiative will help the company keep its users on its various applications. Several states appeared concerned following this announcement, as they are worried about the various regulations surrounding this new “private” financial system which could indirectly hurt the banks. Facebook’s stock ended Tuesday session down 0.3%.

European Central Bank

The ECB President Mario Draghi has announced for the second time this month the possibility of a further cut in interest rates after more than three years of stagnation. “Further cuts in policy rates and mitigating measures to contain any side effects remain part of our tools,” said Mario Draghi. However, the comments of the ECB President annoyed Donald Trump. The US president has indeed accused the ECB of manipulating exchange rates for the benefit of the euro area. “Mario Draghi just announced more stimulus could come, which immediately dropped the euro against the dollar, making it unfairly easier for them to compete against the USA. They have been getting away with this for years, along with China and others” tweeted Donald Trump.

The ECB President responded to the US President’s remarks on Tuesday rejecting the accusations. “We have no exchange rate target,” Mario Draghi said. “We have our mission. We have our mandate […] price stability,” he added, noting that this was his only mandate.

Fed

As expected, the Fed’s monetary policy committee kept its key rate between 2.25% and 2.5%. Trade tensions and uncertainties surrounding the strength of the global economy could justify a possible decline in interest rates. The Federal Reserve has also revised down its inflation forecast for this year to 1.5% against 1.8% projected in March.

“In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.” “Why not right now,” he said. “We thought it was better to have a clearer picture of things and we will learn more soon” on the evolution of the economy, said the Fed. The next meeting will be held on July 30-31 and many believe the Fed may decide to cut rates.

The Pratte Portfolio Management team wishes you a good and relaxing summer!

 

Pratte Portfolio Management is a firm registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).
Intended to provide general information about markets and securities and not to meet your specific needs, this report is the result of the author’s only work. The opinions (including any recommendations, if any) expressed in this report are those of the author only and do not necessarily represent those of Pratte Portfolio Management and do not constitute securities investment advisory activities designed to meet your specific needs.
The information contained in this report is derived from sources believed to be reliable, but the accuracy and completeness of this information can not be guaranteed and, in providing the information, the author and Pratte Portfolio Management assume no liability whatsoever. This information was current as of the date indicated in this bulletin, and neither the author nor Pratte Portfolio Management assumes any obligation to update it or to report any new developments with respect to this information. This report is intended for distribution in jurisdictions where the author and Pratte Portfolio Management are registered for trading in securities. Any distribution or diffusion of this report in another territory is forbidden. The author, Pratte Portfolio Management, its affiliates and their respective directors, officers and employees, and the companies with which they are associated may, from time to time, hold securities referred to in this report.
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