Equity markets have seen a recovery lately as hopes for more economic stimulus are on the rise. There is no better opportunity to confront these views with central bankers’ thinking than annual conference on monetary policy that is taking place in Jackson Hole. In this analysis we outline what to expect and take a look at markets that could react the most.
Bar is set high for central bankers
Jackson Hole monetary policy symposium became famous in 2011 when Ben Bernanke announced the launch of QE2 and investors look for clues on future policy moves ever since. This year could not be more relevant as the Fed has just cut rates for the first time in this decade and global economy seems to be slowing down. What we have seen lately on the markets is a wild rally on bonds and precious metals (gold and silver) and at the same time equity markets still being close to cycle highs, especially in the US. This is a sign that markets expect central banks to deliver massive easing cycle across the globe that will lift economic conditions once again.
For the start, even major monetary stimulus may not suffice to take the global growth to another level, especially at this stage of the business cycle. More importantly though, recent remarks from the Fed and (partly) the ECB suggest that central banks are not sure if such “panic easing” is warranted. Although the manufacturing sector has been clearly struggling, the consumer seems to quite resilient (at least for now) and we have seen that both Powell (set to speak on Friday, 4pm CEST) and Draghi did not want to admit that recession or even deeper slowdown was likely. If president Powell remains cautious and continues to say that the cut was just a “mid-cycle adjustment” markets might be in for a heavy disappointment. In such case watch these 3 markets for reaction:
The key US index has rebounded from a modest sell-off but while the correction was similar to those from May, a recovery has stalled (unlike in June). If markets are disappointed by the Fed, the 2942 short term resistance might become long-term one and bears will be looking at 2800 support that was tested earlier this month. (source: xStation5)
Gold has benefited from expectations on policy expansion in a big way and any disappointment could trigger a potentially abrupt pullback as speculative positioning on this market is extremely elevated. However, the longer trend looks very strong. In the short term, the nearest support could be found around $1450/oz. (source: xStation5)
The USDJPY currency pair is the most linked with a rally on bonds as the pair declines when US bond yields fall. USDJPY has been in a clear downtrend and should Powell disappoint investors this tendency could be reinforced. The major resistance zone can be spotted around 107.00. (source: xStation5)