Market and Economic Update: US Equities back in record territory
29/10/19
From George Lucas, Raiz CEO
S&P 500 nears record high
This week, the S&P 500 was back in record territory as renewed optimism about the US-China trade war and a months-long sell-off in bonds lifted investor confidence, sparking a rally in cheap, beaten-up stocks. The S&P 500’s return to near record highs brings its advance for the year to 20.7 per cent.
Meanwhile, the Nasdaq Composite now sits about 1 per cent from its peak close of three months ago, while the Dow Jones Industrial Average is 1.3 per cent from its July 15 record.
US and China progress trade deal
The rally in stocks was largely fuelled by optimism of a tentative truce in the US-China trade stoush driven by comments from the office of US Trade Representative Robert Lighthizer that the two global superpowers were “close to finalising some sections” of an interim trade deal.
At the same time, the S&P 500 doesn’t overall appear to be overvalued. The cyclically-adjusted price/earnings ratio (CAPE) of the S&P 500 is nowhere near as high as it was around the turn of the century when the dot com bubble burst. It is also not that far from its 40-year average.
Still in the US, it’s likely that the US Federal Reserve will cut interest rates again this week as officials have shown no signs of pushing back on market expectations for looser policy. The Fed’s decision on Wednesday will come hours after US GDP data is expected to show another slowdown in Q3.
Mario Draghi exits ECB, Brexit breakthrough in UK
In Europe, this week saw President of the European Central Bank, Mario Draghi, preside over his last ECB meeting, which caused few ripples in the markets. Recent decisions under Draghi’s leadership to cut rates and relaunch quantitative easing (QE) has set the stage for even more easing in Europe in 2020 given the gloomy eurozone outlook. The ECB remains divided over Draghi’s policies.
Turning to the UK, Brexit took a step forward this week with the UK Parliament voting to pass into law Prime Minister Boris Johnson’s Brexit deal — the first time in five attempts there’s been a parliamentary majority for any type of deal. However, the second vote on the government’s plan to write into law all the necessary Brexit legislation in time to leave the EU on October 31 was rejected.
Given the latest result, it looks unlikely that the UK will leave the EU by that date, but more likely that the leave date will instead be January 31, 2020.
Indonesian central bank slashes policy rate
Elsewhere, the Bank of Indonesia cut its policy rate again by 25 basis points, to 5.0 per cent, signalling that its main priority remains supporting the southeast Asian nation’s struggling economy.
The Indonesian central bank needs to get the rupiah to fall. If it starts to drop back against the US dollar over the coming months, then it could be nearing the end of the easing cycle.
In Australia, the ABS on Wednesday issues the Consumer Price Index (CPI) for the September quarter. Headline inflation is expected to ease to 1.4 per cent in Q3, from 1.6 per cent in Q2.
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