Stocks recover across the board, Draghi questions Fed’s independence

Summary:

• A widespread recovery has been seen across equity markets around the globe
• Mario Draghi called the Fed’s independence into question
• SNB’s Jordan still sees room for further rate cuts if needed

Widespread rebound

The end of the past trading week brought an improvement in risk sentiment resulting in decent gains in the US equity market. All three major indices finished Friday’s trading clearly higher with the Dow Jones (US30) rallying as much as 1% - Walt Disney was the major contributor after it rose over 11%. The stock surged to an all-time high on the back of enthusiasm related to the company’s streaming service, Disney Plus. The platform is set to debut on November 12 and it is expected to be a major rival for both Netflix and Amazon Prime. European stock markets also ended Friday’s trading higher, albeit the gains were quite moderate. Let us recall that the general improvement in risk sentiment came in following the credit data from China suggesting the world’s second largest economy injected a lot of money into the economy during the first three months of the year trying to buttress stuttering economic growth. At the same time, we also saw a noticeable increase in money stock, being usually a sign of increased economic activity. All of that means that one may hope the global economy has already passed a trough and the remaining part of this year will be better, and much better than many economists foretold several weeks ago. Optimism is also discernible in Asian equity markets with the Japanese NIKKEI (JAP225) rising as much as 1.45% at the time of writing. Elsewhere, the Shanghai Composite is going up 1% while the Hang Seng (CHNComp) is gaining 0.7%. On top of that, it needs underline a massive rally in US Treasury yields we saw on Friday with the yield of 10Y bonds rising to 2.56% from 2.49% before the Chinese credit data hit the wires. Bear in mind, the higher longer term yields, the better outlook both economic growth and inflation. Therefore, we reckon that inflation expectations (mostly market-based) could recover over the next couple of weeks.

The US30 seems to be en route to its all-time highs. Improved risk sentiment could also act in favour of higher levels. Source: xStation5

Fed’s independence questioned

ECB’s President Mario Draghi gave a speech on Saturday where he called the Fed’s independence into question, warning that it could undermine the credibility of policy. He stressed that “If the central bank is not independent, then people may well think that monetary policy decisions follow political advice rather than objective assessment of the economic outlook,” Apart from the United States he also pointed to other economies including Turkey and India. At the same time, he ruled out the possibility of the ECB’s independence being questioned. Meanwhile, President Donald Trump renewed his attack on the Federal Reserve claiming that the stock market would have been 5000 to 10000 points higher, if the US central bank had not raised rates. Although it is nothing new, it underlines strained relations between the White House and the Federal Reserve.

Also over the weekend we got remarks from SNB’s President Thomas Jordan who stressed that there was more room to cut rates if needed. He also said that the balance sheet could also be used for interventions in the foreign exchange market. Finally, Jordan added that there was no reason to change monetary policy. We may stick to our view that the Swiss central bank remains a long way off the beginning of monetary tightening making the franc not so attractive as it would be if rates were higher.

After a jump last week the EURCHF has reached a resistance in the form of the 50% retracement. If bulls deal with this obstacle, the cross could continue climbing. Source: xStation5

In the other news:

• ECB’s Praet and Weidmann do not rule out tiering rates, a concept which needs to be discussed in detail, as Mario Draghi said at the last ECB’s press conference

• New Zealand’s services PMI for March fell to 52.9 from 53.6