In my last blog post on 10/1/19 I highlighted a number of things that would be good for equity markets, the first was the Federal Reserve, the US central bank pausing on interest rate rises. On Wednesday the Fed announced borrowing costs would be unchanged. The tone of their statement was much more dovish than previously. They recognised that inflation was muted and remains close to its 2% target. The Fed also expressed it was willing to be flexible on its Quantitative Tightening (QT) programme. QT is the reduction in US government’s balance sheet, which is rolling off $50 billion of bonds each month, thereby reversing QE. In December the Chairman of the Fed, Jerome Powell had said the balance sheet reduction was on autopilot, which spooked investors. The pause was also in recognition of domestic and global economic “cross-currents,” including the US/China trade war, weaker growth in China and Brexit and the harm that an aggressive monetary policy could have on financial markets.
The markets liked what they heard, with a rally in equities around the world. The dollar fell against most of its peers and gold rose to an eight month high. In general commodities prices are inversely correlated with the dollar because they are priced in dollars.* A weaker dollar is also positive for emerging markets.
It is early days yet but January was a better month for investors after the sell-off between September and December.
*Commodities are priced in dollars. What this means is that they become cheaper in local currencies if the dollar weakens, even if the underlying price of the commodity e.g. gold or oil does not change. For example if the £:$ exchange rate is £1 = $1.30 and the dollar weakens to £1 = $1.40, a UK investor buying dollars to buy gold acquires more dollars for a fixed investment and hence acquires more gold.
The content of this blog is intended for general commentary only and is based on my understanding of current stock market conditions. Nothing in this article should be construed as personal investment advice, for example to invest in equities. You should seek individual advice based on your own financial circumstances before making investment decisions.