- Fed chairman Jerome Powell testimony: Last week, the Fed formally announced its latest policy, Average Inflation Targeting (AIT), in an effort to protect the US economy from the ravages of the pandemic. This is designed to try and boost inflation, by allowing price rises in the US to run above 2% for a period of time to make up for other periods of time when the US inflation rate has been weaker than 2%. This policy had been fully expected, it was first announced at the Jackson Hole central banking conference at the end of August, and its market impact had mostly been felt – the dollar has weakened substantially since then, while the S&P 500 made a fresh record high at the start of September. Since then, US stocks, and tech stock in particular, have fallen sharply and the dollar index has stabilised, albeit at a low level. This week, Fed chairman Jerome Powell will testify to Congress on Wednesday and Thursday, in relation to US monetary policy. We expect the main line of questioning from US Politicians to the Fed chief will be whether the AIT will work, and if there is another lockdown or economic crisis does the Fed have any ammo left to boost the economy. These are hefty questions and any sign that the Fed is at the bottom of the toolbox policy wise could spook financial markets, while signs that they have a plan in case things get worse from here could be met with market cheer. We think it is important to watch tech stocks closely this week. While it is true that tech stocks are hugely overvalued, and thus were probably due a pullback, we do not think that it is a coincidence that the peak of the stock market coincided with the Fed announcing the AIT. Tech stocks and other growth stocks have flourished in the pandemic because they are not closely linked to the US economic performance, and because tech stocks tend to be heavily laden with debt (due to their fast-growing nature) and thus rely on future profit forecasts to boost their stock prices. Both of these conditions require low long-term interest rates in order to flourish. If the Fed is trying to boost inflation down the line, then long term interest rates may rise, which is bad news for tech. It’s the same reason why the gold price has been erratic this month. Thus, it is worth watching how tech stocks react to Powell’s speeches this week. If they rally, and recoup some of their recent losses, then it could be a sign that financial markets do not have faith that the Fed can stoke inflation down the line, i.e., you can’t talk inflation higher. If Powell convinces Congress and all of us geeky market fiends that the Fed has inflation under control, then tech could have further to fall. We would also point out some major contradictions in financial markets right now, tech stocks are falling yet Snowflake Inc had a hugely successful IPO last week and saw its share price double. This is the nature of financial markets, even though tech is pulling back, there will always be some exceptions to the rule. However, Snowflake Inc could see its share price struggle this week due to extremely high valuations. Overall, the tech sector may be sensitive to Powell’s testimony this week, so don’t trade the Nasdaq without first watching what he has to say at 1400 BST on Wednesday and Thursday.
- Bank of England: Compared to the Fed, the Bank of England and the ECB have been far less direct in their communications of late. At the last ECB meeting the bank did not sound concerned about euro strength, however, last week a torrent of ECB policy makers tried to reverse that assumption by talking down the currency. Likewise, at the Jackson Hole symposium the BOE chief, Andrew Bailey, did not suggest that negative interest rates could be coming for the UK. However, last week’s BOE meeting and subsequent minutes showed that negative interest rates had been discussed, and the Bank was setting up a taskforce in Q4 to decide how they could be implemented. The BOE Governor testifies to the Treasury on Tuesday and the market will want to know: 1, are negative interest rates a possibility or an insurance policy. 2, what comes after negative interest rates? We lean more towards the argument that negative interest rates remain an insurance policy only, in case the UK does not reach a trade deal with the EU and has to revert to World Trading Organisation rules in 2021. We remain optimistic that a trade deal with the EU will be reached in time for next month’s deadline, even with the best efforts of the government to persuade us otherwise, thus the negative interest rate discussion cannot be analysed in isolation. For instance, if there is some progress in the EU/ UK trade negotiations this week then talk of negative interest rates may have no impact on the pound. GBP/USD dipped on the back of the BOE minutes last Thursday and failed again on Friday to recover and break above $1.30. We continue to believe that the trend for GBP/USD is higher unless we get a break of support at $1.2860. EUR/GBP also managed to stage a recovery last week, although it stalled at 0.9180, we believe that EUR/GBP may struggle to gain further traction particularly if there is good news on the trade talks front in the coming days and weeks.
- Economic check-up: advanced PMI reports for September will be released this week for the major economies. These will give a timely insight into whether the pick-up in Covid infection rates around the world, and the imposition of some lifestyle restrictions, have had an economic impact. Analyst estimates suggest that they expect the PMI surveys to be broadly similar to August, however, any major disappointments for the UK and the US, in particular, could trigger a sell-off in US and UK stocks, particularly the S&P 500, Russel 2000, and the FTSE 100. As we mention above, signs that the broader global economy are weak could be good news for tech stocks, as it could keep long term interest rates lower for longer. If PMIs do better than expected, then we may see non-US stocks, and non-tech stocks outperform. Interestingly, since Germany has mostly avoided further lockdowns and a second wave of the pandemic, we would expect Europe’s figures to come in line, or better than expectations, which may give a short-term boost to the EUR.
This material is published by Minerva Analysis LTD for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified and Minerva Analysis LTD makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of Minerva Analysis’ employees, as of this date and are subject to change without notice. We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Past performance is not a reliable indicator of future results.