The Fed’s policy, the renewed pandemic and the US presidential election are the three main themes that dictate the evolution of the markets.
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Last week, the Federal Reserve announced that it would buy corporate bonds on the secondary market for the first time in its history. The President of the United States, Donald Trump, has indicated that he has not ruled out the possibility of “total decoupling with China”, which he once again held responsible for the coronavirus pandemic. A few days ago, California, Texas, Florida and Arizona recorded their highest average weekly infection rates.
These different topical subjects illustrate the three major themes that today dictate the evolution of the markets: the uninterrupted monetary stimulus of central banks (the policy of the Fed), the theme of the second wave and that of the American presidential election. Which of these themes will be the most powerful, the most stable and the most sustainable?
Central bank monetary stimulus
Fed policy has never been more explicit. At the press conference following the Federal Open Market Committee (FOMC) meeting, its chairman, Jerome Powell, said, “We are not considering raising rates. We are not even considering considering raising rates. Our thinking is about supporting the economy. ”
The Fed intends to restore financial conditions
similar to those in effect before the coronavirus crisis.
At a minimum, the Fed intends to restore financial conditions similar to those in effect before the coronavirus crisis. The latest corporate bond purchases are the latest step.
Other leading issuing institutions such as the European Central Bank, the Bank of England and the People’s Bank of China continue to support their economies with the help of monetary stimulus. Last week, the Bank of England increased the amount allocated to its quantitative easing program by £ 100 billion.
Fear of the second wave
The hype surrounding a possible second wave could suggest that this is the main factor determining market developments. In the past two weeks, the increase in the number of cases around the world, including in Beijing and in a certain number of American federated states, made investors fear a second wave of COVID-19 cases, with a resurgence volatility.
Even if the specter of a second wave could continue
To fuel volatility, the recovery could intensify in the coming year.
Nevertheless, it is important to remember that a) this resurgence is still modest compared to the capacity of reception of health establishments, b) various governments, in particular that of the United States, declared that there would not be national reconfiguration, c) the specter of a second epidemic wave had no negative impact on household consumption and d) the search for a vaccine and treatments is still recording progress.
As a result, although the specter of a second wave may continue to fuel volatility, the recovery may ultimately intensify in the coming year.
The American presidential
Sino-American tensions are becoming an issue in the presidential campaign in the United States. However, the latter has not yet become the first concern of investors but should gain importance in the next four months.
Polls suggest that the race for the White House will be tight and, given the economic upheavals caused by the coronavirus, certain points on the candidates’ political programs remain to be clarified.
The American elections are likely to fuel volatility in the markets if investors are ever afraid of themselves. They fear both an overwhelming victory for the Democratic Party resulting in higher taxes, tougher regulations and anti-trust measures against the tech giants, as well as a re-election of President Trump on an anti-Chinese program. However, neither of these outcomes is acquired.
Fed unlikely to cut back
monetary stimulus also near the poll.
Consequently, UBS Research advises investors against positioning themselves with a view to a given electoral result, in particular at this stage. Nevertheless, it is clear that the issue of the US presidential is inseparable from that of the policy of the Fed.
To avoid giving the impression of political bias, it is unlikely that the latter will reduce its monetary stimulus effort as close to the election. In addition, both the Republican Party and the Democratic Party will likely call for a new stimulus effort to gain the favor of voters.
Stay invested
Overall, UBS Research believes that the second wave and the US presidential election will continue to fuel market volatility, with news blowing hot and cold about the speed and strength of the economic recovery .
The Fed’s policy will have an influence in the medium term. To quote Theodore Roosevelt, the Fed “speaks softly but carries a big stick”. Against this backdrop, investors had better stay exposed rather than sit on the sidelines.
UBS Research is optimistic for stocks as well as bonds. Profits are expected to rebound in the second half and excess cash continues to support risky assets. Under these conditions, global equities could still have upside potential, especially in sectors that have not rebounded as much so far.
Long-term low interest rates and substantial central bank asset purchases will continue to support the credit market. UBS Research has a preference for high-yielding dollar bonds, high-yielding Asian bonds and emerging dollar-denominated sovereign bonds.
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