Mid-Week Drivers – The FED Takes Over Steering the Economy

It may have been a quiet week on the data front, but it’s not been a quiet week for the global financial markets. The FED saved the bulls from a Monday meltdown. Hopes of progress on Brexit continues to support the Pound. The BoE may have other ideas, however. Then there’s COVID-19 and the stats.

Already on the first day of the week, a large announcement was made by the Federal Reserve.

Could we analyze the event in detail?

It’s named the Secondary Market Credit Facility and the FED can now purchase up to $250bn in corporate bonds of eligible issuers

The bonds need to have been rated investment grade as at 22^nd March 2020. They must also have a remaining maturity of 5-years or less.

That means that the FED could purchase corporate bonds that were downgraded to junk as a result of the pandemic.

Monday’s move is a demonstration of the FED’s willingness to do just about anything to support a return to a pre-pandemic environment.

The extension into corporate bonds also affirms the FED’s view that this is going to be a rocky economic recovery.

In addition, the FED also announced a “Mainstreet Lending Program” that would support small to medium-sized companies.

It is clear then that events are just about to unfold and a lot more information should be available later in the week.

Meanwhile, what about the reason for the monetary stimulus – COVID 19?

Yes, the level of monetary policy stimulus that we are seeing is because of the COVID-19 pandemic.

Some central banks were already on an accommodative footing, however, or considering a shift.

We had an extended U.S-China trade war that had impacted the global economy before the pandemic.

For the BoE, there was also Brexit that has continued to deliver economic uncertainty.

The stock market could experience another drop.

In the meantime, are there any other notable fundamental events going on?

For the equity markets, we are seeing catalyst after catalyst support the global equity markets. At some point, these catalysts are going to stop and the markets will need to consider what lies ahead.

Corporate earnings are unlikely to be anything to write home about and then there’s the economic data…

With unemployment at such high levels, consumer spending will likely be lackluster. We saw a bounce back in U.S retail sales in May but even that is unsustainable.

Tight purse strings will pin back spending and ultimately service sector activity.

You then have U.S tensions with China, Russia, and even Iran, all of which could spook the markets.

And finally, there is the U.S Presidential Election in November. With July rapidly approaching, things will certainly start heating up as the race gets underway with gusto.

The Bank of England could follow the Federal Reserve.

Is there anything else that you would like to add?

Mark Carney couldn’t have chosen a better time to have stepped down. BoE Governor Bailey has his hands full.

Following last week’s GDP numbers, he assured the markets that he is willing and able to deliver support.

Throw in Brexit and uncertainty over what lies ahead and lockdown measures in the UK, there must be a move on Thursday.

We may even hear the talk of negative rates that should ultimately sink a resilient Pound.

Hopes of progress on Brexit have certainly supported the Pound. With the EU and Britain agreeing to no extension to the transition period, the pressure is on, however…