World markets opened the week with great enthusiasm and by Wednesday, the MSCI World Index hit a record. Encouraged by signs US-China remain committed to the phase one trade deal and liquidity packages, investors embraced the risk-on mood and stocks flew high. The much-anticipated Jackson Hole Economic Policy Symposium brought some reassurance that central banks will likely continue to let the markets-friendly monetary policy settings in place for longer.
Major US equity indices continued their rally. The S&P 500 and the NASDAQ set new record highs; the Dow turned positive year to date. A recommitment by the U.S. and China to their partial trade deal seemed to provide a bullish backdrop, as well as better-than-expected reads on personal income and spending and the Fed's shift in policy. The chairman of the Federal Reserve Board, Jerome Powell in his speech at the closely-monitored Jackson Hole Economic Policy Symposium
unveiled the Fed's new policy framework. He stated that the central bank will let inflation run slightly higher than the traditional 2.0% target, prioritizing the recovery of the labour market as unemployment
remains painfully high. In other words, rates will stay lower for longer, which is a tailwind for equities. Meanwhile, other Fed officials did not paint a rosy picture. Barkin said businesses are still hesitant to hire, George warned double-dip recession is possible and Bowman stated that the economic recovery will be slow and uneven. In other economic news, a revised government estimate issued on
Thursday put the Q2 GDP decline at 31.7%, the largest fall on record. And Coresight Research estimates 25% of America’s roughly 1,000 malls will close over the next three to five years,
In Japan, the Nikkei Index declined on Friday following the surprise resignation of Japan’s longest-serving prime minister, Shinzo Abe, although the official confirmation came after the market close. The Japanese yen jumped as investors looked for a safe haven and anticipated further deflationary forces.
Abe leaves a legacy marked by a unique economic stimulus program, also know as Abenomics, which called for more spending, a larger money supply and reforms to make the economy more competitive. Earlier in the week, Bank of Japan’s board member, Hitoshi Suzuki warned of the dangers of prolonged, low-interest-rate environment but also noted the benefits of monetary easing outweigh the exceeding costs. On the data front, Japan's industry activity jumped 6.1% MoM in June.
Mainland Chinese stock markets rose for the week as American and Chinese officials delivered calming messages that they will continue to push forward on the implementation of the trade deal. Sun Guofeng, head of the monetary policy department at the People’s Bank of China, told a press conference on Tuesday the central bank will maintain a "normal" monetary policy.
The onshore yuan reached January highs compared to the dollar on Wednesday after the People's Bank of China injected $29 billion into banking system via reverse repos. Meanwhile, profits at China’s industrial firms grew for a third straight month in July and at the fastest pace since June 2018.
In Australia, the ASX 200 recorded a second straight weekly decline and Consumer Staples, Communication Services and Utilities sectors were in the red for the month. Friday’s updated budget forecasts from the Parliamentary Budget Office suggests coronavirus could increase Australia’s net debt by up to a staggering $800 billion over the next decade – nearly a quarter of the country’s gross domestic product (GDP) and $180 billion more than was predicted just two months ago.
Europe’s equity markets finished the week with solid gains, as investors took heart from further economic stimulus in France and Germany. France will guarantee 3 billion euros in quasi-equity loans for SMEs, Finance Minister Bruno Le Maire told Les Echos newspaper on Tuesday. France's Q2 GDP contracted at a double-digit pace.
In Germany, coalition parties agreed to extend the coronavirus relief measures until the end of the year. The country's GDP is down by 9.7% in Q2 and although the business climate improved in August, Germany's economic recovery remains fragile, according to Ifo institute economist Klaus Wohlrabe. And according to Finance Minister Olaf Scholz, the economy will recover by early 2022.
In the Euro area, economic confidence improved more than expected for this month but things are still a mess. Spain's retail sales dropped and German consumer confidence fell for September.
Everything is bad, and yet somehow the stock market is good. Economic experts say there are technical and policy reasons why stock prices today don’t reflect the "real" economy. Still, the improvement in economic indicators from quite-depressed levels has made the stock market’s dramatic surge off the March lows seem a bit less disconnected from the economic
fundamentals. Where will all this lead us to? Plenty of unknowns and risks ahead.
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