Highest Ever Monetary Easing By FED Stabilizes The S&P500
Large capitalisation stocks pushed major indices higher during the past week. Growth stocks had an edge over their value counterparts and the technology sector led gains after positive results from chipmakers and leaders Microsoft and Apple. Solid gains in Amazon also boosted the consumer discretionary segment and the healthcare segment gained as demand for this sector is considered relatively inelastic.
The funding stress which hampered the functioning of markets in March has dissipated further after the US FED decisively increased the size of its balance sheet (see chart above) and started purchasing commercial paper last week. The correlation between stocks and bonds which matter to balanced portfolios had turned positive a few weeks ago but is now improving and commercial paper spreads are also normalising. There is a willingness to further increase fiscal stimulus in most major economies even if it is unlikely to be at the same pace seen in recent weeks.
Another positive is that growth in the number of cases of the virus has been slowing in major economies during the past week. The focus has therefore turned towards planning for the easing of restrictions and this has improved investor sentiment, enhancing the perception that aggregate demand could recover in the second half of the year.
On a less favourable note, the soft economic data is indicative of a double digit contraction across regions. We have also started seeing hard data move in the same direction; US retail sales for March fell by 8.7% and industrial production fell 5.4%. It should be noted that these indicators captured a part of the post lockdown period and could further worsen in the coming months. For its part, the IMF projects that the global economy will contract by 3% this year but estimates that this will rebound to 5.8% next year.
The labour market fallout and instantaneous policy response helped risk assets rebound during the past two weeks. It is likely that future market action will be more reliant on the news flow.
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20 April 2020
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