A few words can go a long way when the equity market is this anxious. There are four key issues overhanging equity market sentiment at the moment – the fear of an aggressive Fed, the US-China trade spat, the Brexit plan (if any), and the Italian-EU budget dispute. This week is a big week on the first two. This past Wednesday, Fed Chairman Jay Powell gave a speech to the Economic Club of New York in which the comments were interpreted as “dovish” – meaning that the Fed may be less aggressive in pursuing interest rate hikes than previously communicated. In fact, just after the speech the Fed Funds futures market priced in a marginally higher probability of a hike this December (soundly above 80%) but materially lower probability of further Fed increases across meetings next year. The US equity market took it and ran through the rest of the day to close at the highs up between 2.0% and 2.5% depending on the index.
The magnitude of the equity move on his remarks demonstrates that we remain in an emotional period in the market. It is typical after a swift draw down in equities to experience sideways volatility in which the index retests the recent low a few times. This period is often marked by big daily percent changes up and down as traders react (perhaps overreact) to incremental information on the day’s biggest concerns. This recent equity market correction which started in October has been no different. It takes time for nerves to settle, investors to gain perspective on the relevant concerns, and to refocus some attention back to fundamentals.
There are more words to come soon on the key issues we highlighted. Today through the weekend, the G-20 meeting launches in Buenos Aires where President Trump and Chinese President Xi Jinping are expected to have dinner and discuss trade relations. There are a range of potential outcomes, but the best case scenario that could reasonably be expected is some sort of “cease fire” on tariffs with an intent to address the true issues of fair market access and intellectual property protection. On December 11th, the House of Commons is expected to vote on whether to support the draft Brexit deal that Prime Minister Theresa May has developed and which has been approved by the European Union. The Bank of England released an analysis this week suggesting how economically damaging a “no plan” Brexit in March could be as the politics of UK parliamentary support remain difficult. Finally, the Fed will have their policy meeting with decision and full communication (press release, forecasts, and Q&A) on December 19th. Language used in each of these key dates will be parsed for any special meaning, but as always time will tell.