The Fed revealed silently yesterday that they are injecting half a trillion dollars into the financial system in order to avoid a cash crunch into year-end and spiking repo rates. In other words, the Fed put is strong and alive. We are basically just waiting for the Fed to increase its monetary operations to coupons which means real QE. At the same time, other central banks are also easing pushing down rates improving the spread between fixed income and equities, which means equities look more attractive as long as the economy doesn’t go into recession.
Fiscal impulse is increasing with both China and the US increasing fiscal deficits. Japan just announced that they are increasing spending following South Korea’s decision a month earlier. United Kingdom will most likely increase spending next year under Boris Johnson as the new Conservative party is not a believer in austerity and balanced budgets. It simply doesn’t buy voters. The EU is thinking about green bonds and many EU countries have indicated higher spending next year. Overall, all fiscal engines are ramping up rpm (revolutions per minute).
The UK election clears the path for a Brexit which lowers uncertainty and increases the odds of investments coming back to the UK. But the real take away from the election is that austerity will be left behind by Boris Johnson. That’s the real change here.
OECD’s leading indicators are showing the global economy is turning around. This is good for profit expectations in 2020 and the recovery phase in the economy is typically the best period for equities against bonds with an average 9.4% excess return for equities over the period.Lastly, the big news yesterday was the apparent breakthrough on the US-China trade deal “first phase”, but since the US media highlighted that Trump had signed off on the deal the Chinese side has been completely quiet. While it looks like a temporary truce and small tokens by each side in the trade war, the past two years have taught us that things can change fast. We don’t really know until Sunday evening where we stand on the trade issue.