AG Macro Brief - 04 Mar 2020
As expected, the Fed cut rates inter-meeting by 50 basis points. It is the first time Fed is doing something like this in about 13 years. The last time was on Aug 17, 2007. The Fed action was not well received by the markets.
The Dow immediately fell by 500 points. This highlights the inherent mood of the markets. The markets need more. There will be supportive actions from BoJ and ECB today but that in itself will not currently change the direction of the markets.
In any other normal circumstances if the Fed had cut by 50 basis points, the markets would have roared up by more than a 1000 points.
While Mnuchin, the treasury secretary, applauded the Fed chairman for his actions, President Trump was more critical. He mourned and complained that the Fed is still not doing enough. That the Fed is not a leader anymore but a follower… So, in this ongoing war between the Fed and the White House, I think that Trump will take control of the situation. If situation worsens between now and the Fed meeting on Mar 16-17, we can expect another cut.
While world leaders yesterday pledged to expand health services and take action to aid in the response to the ‘virus’ and support the economy, it would take a signal from global leaders (president and prime ministers) that they will do whatever it takes to save the situation. Something on the lines what Mario Draghi said when Italy and Spain were in trouble couple of years back.
With President Trump facing an election year and the way he has so far used the strength of the economy as a selling point, he will go ahead and take all stops out to bring in stimulus particularly in areas of health care, manufacturing and infrastructure. That is his only way to stay in the race for a second term. So, I am pretty confident that some big stimulus is coming.
Just like what happened during the GFC, when we had the $800 bio ‘American Recovery and Reinvestment Act of 2009’. It’s biggest beneficiary was Silicon Valley actually. When Obama doled out $100 bio dollars worth of funding for the discovery, development and implementation of new technologies, companies like Uber, AirBnB and WeWork were born. This time, the beneficiaries should be in healthcare, manufacturing and infrastructure.
So, I think something big will happen on the global front to contain the situation. Meanwhile, markets will be all over the place .
Happy Hunting!
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.