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LGT Navigator: Can stock markets continue relief rally? – Fed interest rate decision in focus

September 16, 2020

Good economic data from the US, China and Germany, as well as hopes for a rapid approval of a Covid-19 vaccine, have again led to price gains on Wall Street and Asian stock markets. Today, investors will focus in particular on the first monetary policy meeting of the US Federal Reserve (Fed) after the recent strategic modification. The fight in the US Congress over the controversial corona aid package will continue to be at the center of attention.

Stock markets continue relief rally ­ Fed interest rate decision in focus
Wall Street

The US stock indices continued their recovery yesterday, driven in part by a renewed increase in demand for technology stocks after the recent correction. Buying sentiment was also boosted by the hope stirred up by the US President that a corona vaccine will soon be approved, as well as by good economic data. The Empire State Index, which measures the business conditions for industrial companies in the New York region, unexpectedly improved significantly. The index rose from 3.7 to 17 points in September, according to the Federal Reserve Bank of New York. Analysts had predicted an increase to 6.9 points. The Dow Jones Industrial closed virtually unchanged after the solid gains at the beginning of the week, while the S&P 500, which covers the entire market, climbed by +0.5% to 3 401.20 points. The technology-heavy Nasdaq 100 even rose by +1.43% to 11 438.87 points. Good economic data was also reported from China. Both industrial production and retail sales increased more than expected. Most Asian equities benefited from the brighter market sentiment and mostly reported moderate daily gains. Investors are now eagerly awaiting the Fed's monetary policy decision tonight.

The Fed's first assessment after the strategy change

The focus of financial markets today lies on the interest rate decision of the Federal Reserve (Fed). It is the first meeting after Fed Chairman Jerome Powell announced a strategy adjustment at the Jackson Hole symposium. In the process, the central bank has gained more flexibility with regard to inflationary developments. Investors are hoping that meeting will provide a first insight into what this adjustment could mean for future monetary policy. However, a change in the monetary policy course is not expected.

No agreement in sight on Capitol Hill

A group of 25 Republicans and 25 Democrats tried to break the blockade on Tuesday with a cross-party compromise proposal. The draft provides for support measures in the amount of USD 1.5 trillion. The Democratic leader of the House of Representatives, Nancy Pelosi, emphasized that the Democrats were prepared to postpone the recess of the session scheduled for early October in order to reach an agreement with the Republicans after all.

China's consumers spend more money

In China, the buying mood increased in summer. Chinese retailers recorded +0.5% more income in August than in the previous year – it is the first time this year that sales growth has resulted in a year-on-year comparison. This development is a signal that China's economy is slowly recovering from the corona shock. From January to August, the retailers took in -8.6% less. Online retailers, on the other hand, recorded a sales increase of 15.8% in the same period.

German financial experts are optimistic

In Germany, financial experts are once again looking more positively into the future. The ZEW Indicator of Economic Sentiment improved surprisingly and rose by 5.9 points to 77.4 in September. This means that the barometer is now at its highest level since May 2000. Analysts had expected a decline to 69.5 points. The stock market professionals have a better assessment of the current economic situation in Germany in particular. In the second quarter, the German gross domestic product shrank by 9.7%. Market observers expect a noticeable recovery in the second half of the year.

Further declining inflation trend in the euro zone

In Italy and France, inflation fell significantly in August. Prices in Italy fell by -0.5% year-on-year, whereas the inflation rate in the previous month was still +0.8%. In France, inflation rose by +0.2% within a year. In July the inflation rate was +0.9%.

Crude oil inventories at record high

The industrialized countries are storing more crude oil than ever before: in July, stocks amounted to 3.23bn barrels, according to the International Energy Agency (IEA). The reason for this is the corona pandemic, which is dampening demand for the black gold. The lull is likely to continue. Thus, the IEA has revised its forecast downwards for the second time and expects a demand of 91.7m barrels per day for the current year. This is 200 000 barrels less than previously forecasted and 9.46m barrels a day less than in 2019.



Economic Indicators September 16

MEZ Country Indicator Last
11:00 EZ Trade Balance (July)  +EUR 17.14bn
14:30 US Retail Sales (August)  +1.2%
16:00 US NAHB Housing Market Index (September) +78.0
20:00 US FOMC monetary policy announcement 0.0-0.25%

Earnings Calendar September 24

Country Corporate Period
US Nike Q1


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Source: LGT Bank (Switzerland) Ltd.

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