Dubai: A dovish Federal Reserve may be just what global equities ordered, prompting a revival of the Trump rally after weeks of volatile swings.
Major US indices, which moved into bear market territory last month, are expected to continue their upwards movement this week, following comments from US Fed chief Jerome Powell that the Fed might be more ‘patient’ with rate hikes and would be “listening very carefully” to the market.
The Fed has previously said they would raise rates three times in 2019, but expectations have now been scaled back to two.
“Today’s report should be reason to feel slightly better about US growth prospects. But, in its current mood, the market will probably choose instead to fret about how much more hawkish the Fed might become as a result. And that means more cold turkey for markets. How very appropriate at this time of year,” James Athey, Senior Investment Manager at Aberdeen Standard Investments said.
The Dow index, which gained 3.2 per cent on Friday, had been on an uptrend since US president Donald Trump assumed office in January 2017, gaining more than 38 per cent to peak at 26,951.81.
The Trump rally was based on tax cuts, along with a promise to hike spending on infrastructure projects among others.
The going was good until headwinds — including a trade war and a faster than expected rise in interest rates — emerged.
Global equities had been declining over the finals weeks of December, with the Dow Jones index revisiting levels not seen since January 2017.
“The Fed is finally looking at the financial markets to respond favorably but it may be counterproductive,” said Rohit Nanani, founder and director at DIFC-registered Arrow Capital.
He said if the data continues to be strong, then one could only imagine how long before the Fed is forced to change its language.
“There are clear indications that global economies are slowing, so again the Fed might be overweighing the external factors as the US data has not been disappointing,” Nanani said.
“Emerging market equities should respond positively to this news and we expect the markets to remain positive this week. Also the corporate earnings in the next two weeks should reaffirm a strong US bias,” he added.
Valuations:
The recent sell-off has made US stocks very attractive. The S&P 500 index is now trading at 14x forward earnings, compared to 18.5x at the start of 2018. Global equities are trading around 13x forward earnings, versus a long-term average of 15.7x.
“The decline in valuations suggests that this could prove in time to be a good long-term entry point. That said, with significant uncertainty about the short-term path for some key market drivers, investors should prepare for continued volatility,” Mike Ryan, Chief Investment Officer Americas, UBS Global Wealth Management said.
Pound watched:
The British Pound will be watched closely as with Parliament set to vote on the Brexit deal later in the week.
“All eyes are on the upcoming parliamentary vote and it is widely expected that Theresa May may not have enough support. That could trigger a general election and the volatility for Sterling would spike,” said Naeem Aslam, chief market analyst with Think Markets. The Brexit vote is scheduled on January 14.
Pound rose 0.70 per cent at $1.2722 on Friday, after having lost 6 per cent in the last one year.
