Two key Central Banks finished their monetary policy meetings on Wednesday 29th, and both played the same tune, that low interest rates are here to stay for a while. The Central Bank of Kenya cut its central bank rate by 25 basis points to 7.00 from 7.25 percent. The Federal Reserve as expected left rates unchanged at a band of 0.00 to 0.25 percent, at the same time acknowledging that the Covid-19 pandemic is posting a considerable risk to the medium-term outlook for the economy. The consensus is that low interest rates support economic activity especially as central banks globally ramp up stimulus packages for their economies.
In Asia trading, stocks rose on Thursday, following a rally in US markets on the Federal Reserve’s assurances it will continue with its stimulus programs. Japan’s Nikkei 225 climbed 2.8 percent while Australia’s ASX jumped higher by 1.8 percent in morning trading in Singapore. US futures markets have inched up suggesting US markets could open higher in tandem with the positive risk-on view in the market. There is a good chance that the Fed will put in place more quantitative easing programs in the future and stay committed to keeping interest rates low for some time longer, deploying its full range of tools to support the US economy in this challenging time.
At Mansa-X we expect the near-zero interest rate to continue for the next two to three years. The European Central Bank is expected to leave interest rates unchanged at its Thursday meeting but announce further monetary stimulus by expanding its pandemic emergency purchase, by for example buying junk bonds to support businesses struggling with coronavirus shutdowns. Our view at Mansa-X is that this would boost investor appetite in these euro-denominated assets, hence encourage inflows towards the single currency and lead to tactical euro appreciation. The Euro is already loving this, having gained 0.49 percent against the US dollar on Wednesday, up three of the four trading sessions.
Since mid-March, the Federal Reserve has bought nearly $2 trillion in Treasury and mortgage securities, eclipsing any of its similar programs between 2008 and 2014. With the S&P 500 Index now up more than 30 percent from its low, the question arises if this is a bear market rally or a bull market correction. It seems macro numbers are of no importance for equity markets right now. To a certain extent this is understandable because it often feels like looking into the rear-view mirror and policy response has been very strong. But perhaps markets are getting a bit ahead of themselves now as economic data keep disappointing, painting a gloomier picture ahead. US GDP Q1 annualized printed negative 4.8 percent! France’s GDP collapsed by 5.8% in Q1, the biggest decline on record! And the NASDAQ was up 4% on Wednesday. Markets are not reflective of the underlying poor economic activity. There is a disconnect between financial markets and the economic realities. Things will get worse before they get better but central banks will be there with strong supportive actions. The US has provided more than $2.6 trillion in several economic assistance measurers over the last two months. The impression is that the Federal Reserve is hunkering down for a long fight, not just against the virus but also against its aftereffects, which are likely to last for a protracted period of time.
Globally, more than 3 million people have been infected with Covid-19. China, the first to reopen its economy after emerging from the coronavirus crisis, reported a slower expansion in factory activity in April due to weak external demand. Brent crude, the global gauge of oil prices, jumped 11.1 percent to $25.03 a barrel while US crude (WTI) surged 17.40 percent to $17.68 percent. Fears have eased about the US running out of storage space, after inventories did not climb as quickly as expected. Oil volatility, while almost halved in recent days, remains extreme, currently at 800 percent! So if one is looking for a trade that will get your adrenaline through the roof, one should look at oil.