The U.S. Federal Reserve and Bank of Japan both provided additional ‘insights’ for investors last week, but they did not put to rest the lingering nervousness that pervades. The word ‘insights’ does not exactly mean clarity because investors still have plenty of doubts. The Federal Reserve surprised no one when it did not raise its interest rate this past Wednesday.
The FOMC Statement continued to march to their tired drum beat expressing optimism for future interest rate hikes, but countered within the same statement rather cautious meanderings about weak inflation and soft business investment. What worries investors is that the Fed has put itself into a position that is: damned if you do and damned if you don’t.
The Core Durable Goods Orders and Advance GDP numbers that came out last week from the States will start no parades. While the Fed maintained in its statement that near term risks have diminished it doesn’t necessarily make their beliefs are correct. The USD has traded stronger in essence against the EUR and GBP on the heels of the continuous ramblings from the Fed about potential increases in the U.S. interest rate, which enacting only a mere hike of .25% since their heightened hawkish outlook last year.
The Bank of Japan on Friday admitted that global concerns regarding the Brexit have left it rather cautious about economic outlook, but this doesn’t help anyone explain away the negative interest rates that the BoJ is making investors suffer. Asian investors were hoping that stimulus would be increased significantly in Japan via the BoJ but were disappointed on Friday and the JPY promptly got stronger as risk appetite decreased and the Nikkei also declined. The Japanese Indices will be watched carefully by global investors this week.
The Bank of England will announce their Official Bank Rate this coming Thursday and many analysts are predicting a cut of .25%. While investors have been forced to acknowledge that BoE Governor Mark Carney seems intent on lowering the U.K.’s key interest rate it doesn’t mean that that they are all in agreement with the action. There are some voices that believe the BoE should actually raise its rates in order to strengthen the GBP, but that is not going to happen unless there is a major surprise.
The BoE like the other major central banks have taken on a near zero interest rate policy that is being enacted globally and can be termed ‘helicopter money’. The Brexit has certainly thrown a hiccup into the BoE’s long-term plans, but the U.K. economy was already being challenged like its counterparts in Europe, Asia and North America before the outcome of the vote.
The Preliminary GDP in the U.K. actually came in slightly better last week and while there will be plenty of headwinds for the British economy as it sets into motion its future without being a member of the European Union, it does not mean it will vanish into thin air. The BoE like other central banks needs to embrace the notion that they cannot lead nations out of stagnation on their own. The central banks need to acknowledge that government fiscal policy has a significant role in achieving growth.
Global economies are still in trouble. Investors are still worried about the lack of growth in China and the United States. The bad Advance GDP numbers from the States this past Friday will not make anyone comfortable and the Fed will have a hard time raising its interest rates without any growth. Let’s also mention that the upcoming U.S. election is certain to be hotly contested and like the Brexit could turn things upside down come early November. If U.S. growth remains weak the Fed will be pressured to create a weakened USD.
While stocks and Indices continue to receive plenty of fuel from investors it does not mean the engines producing profits are guaranteed. The USD has continued to find takers, but this is not because the greenback glitters. Europe and the U.K. have their share of problems, European banks – for instance in Italy continue to show worrying flaws and the British need to move forward with working agreements to create a smooth Brexit.
As a barometer to judge where sentiment is as this week starts, Crude Oil is flirting with new short-term lows and if it should fall through current support levels could send shock waves through global markets. Gold has risen in value the past few sessions and it is approaching key resistance levels.
The Federal Reserve may have claimed last week that near term risks have diminished, but this may turn out to be a case of wishful thinking if economic data and market sentiment do not improve.