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Weekly newsletter |19 March 2021| Central banks take center stage

Aarinder Lidder - Mar 20, 2021

Welcome to our weekly newsletter where we talk about what's been going on in investment markets and what to look out for in the days and weeks ahead.

Central banks took Centre stage this week and that's because we had the US Federal Reserve meet on Wednesday. The Bank of Japan had similar meetings this week and the central Bank of England had a rate setting meeting this week as also. The Bank of Canada had their meeting on 10 March and decided to keep interest rates the same.

The last few days have been very interesting. You can't underplay perhaps how important the US Federal Reserve meeting is and what came out of that. We are still very much in this reflation trade. I'm not going to go outline the winners and losers as it is more of the same. Cyclicals doing well versus growth. Value doing well versus growth. That is still the case and we're still seeing bond yields rise for now. One day value is up and growth is down and the next day growth is up and value is down. If you look at China equities for example, they're still doing relatively poorly versus other markets. Therefore, this week is important, the Federal reserve didn’t do anything with its monetary policy hence the market continuing the same rhetoric.

There was certainly a dovish tone in this weeks meeting. If yields keep rising on treasuries for example that will have a potential negative impact on economic growth. We saw in Europe that the European Central Bank last week acted. They effectively sped up their rate of QE (their bond buying program). The market obviously liked this because that would potentially put a lid on the yield of bonds in the euro zone. The market is hoping, particularly if you hold growth stocks that potentially the US will follow a similar path, however this was not seen in this weeks meeting. Going forward the Fed may start to loosen monetary policy which would help growth stocks and bring down treasury yields. If inflation expectations become so ingrained in the market, as they are increasingly becoming, we could see this rotation that we're seeing and the reflation trade start to become much more entrenched. The US Federal Reserve has already hinted at that they're more concerned with full employment then yields themselves on treasuries. However, as things unfold we may see some action.

There comes a point where they may have to act if those yields do rise very quickly and they continue to do so. If that starts to threaten the recovery in America, then the US Federal Reserve might have to step in. The market is waiting to see what happens and it's important for the next few days and weeks to see how the outcome of the meeting will affect the markets. We saw a dovish response which sent the markets much higher on Wednesday only to give back those gains and more the next day.

They certainly haven't made noises to suggest that they're going to do anything and intervene in bond markets yet. That will obviously have a negative impact on assets like gold and emerging market equities. Going forward it feels like this meeting is a bit of a crunch time for emerging markets.

It could be that the reflation trade that we've seen, starts to take a bit of a breather. It could potentially reverse slightly or as some people had expected, the Federal Reserve is taking a very accommodative approach for now that could potentially see markets accelerate. This will mean cyclicals doing well. A lot of the things that we've been seeing doing very well in the last few weeks or month could continue to do so. All we can do now is wait and see what the next few days and weeks looks like. I would imagine we chop around at these levels for the little while as we consolidate for our next move higher. It is important to note the market has pretty much grounded side ways over the last 3 months.

The bottom line is this. We are in a bull market and in a bull market we should expect powerful moves. The recent weakness is to be used to buy the dip as you will be rewarded once we start our next leg higher and I suspect with all my analysis that it is coming very soon.

 

 

 

Canaccord Genuity is a member of the Canadian Investor Protection Fund. The comments and opinions expressed in this newsletter are solely the work of Lidder Capital, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this newsletter, it is for general information only, does not constitute legal or tax advice, and the author, Lidder Capital, does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author, Lidder Capital, or Canaccord Genuity Corp. assume any liability.

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