Market Moves - 20th September

This week Chief Investment Officer, Patrick Farrell, reflects on market movements from the past week, provides an outlook on the economy more generally, and considers the implications of what is unfolding.

Transcript:

Erica Whyte:
We're here in the brand new studio, bring you our house view on the market moving events. My name is Eric Whyte alongside our chief investment officer, Patrick Farrell. To talk through a busy past few days as the Fed has gone ahead and cut interest rates by 50 basis points to the relief of many of the big moves there. And meanwhile, the Bank of England has gone ahead and held the U.K. interest rates on Thursday at 5%, which was expected. But how might markets react and what may be in store down the line? Patrick is here to break it all down. Hi, Patrick. How are you? What was moving markets this past week, what can you share with us?

Patrick Farrell:
Well, as you very correctly pointed out, everyone was very focused in terms of what the Fed was going to do. And there was some newspaper articles that came out earlier in the week that highlighted that the Fed might go 50 basis points and they got the market a little bit more excited at the beginning of the week and it was confirmed.

But we just need to distil it down because it looks, to me it was a surprise. I don't think that they needed to do sort of people's basis points. And when we do break it down, a lot of the press conference that highlighted where Chairman Powell was basically grilled around is this concern, is the Fed behind the game? Are we heading into a recession? What sort of growth concerns are there out there? But he was quite steadfast in relation to the fact that he doesn't see any concerns coming through in the economy and that this is purely a reflection of the confidence that they have that inflation is moving back to 2% and that they really want to make sure that the full employment goal is not jeopardized by having interest rates as tight as what they are.

But markets did react quite strangely to the actual announcement. But I think over time we're not seeing that sort of US growth downturn that some people might be worried about. Then it actually ends up being quite a good result for equities. And so we've seen overnight the US market move one and a half to 2%, which is good. We've seen European markets bounce back. I mean the French markets up over 2% so far. Our market has really benefited from the cut, largely because we've had a big increase on some of the material companies which have been in the doldrums of late. But what this does is it does spur the growth outlook and so that does help the rest of the globe as well as the US in terms of that sort of decision that they've put through.

Erica Whyte:
So I think that what I've been reading is a reason that a lot of people are feeling kind of scared about this big jump, is that a 50 basis point cut has not been done since 2008, which was obviously a horrible time for the economy.

Patrick Farrell:
But it does highlight how the Fed reacts to either like an emergency type situation. And in that 2008 scenario, it was responding to a global financial crisis and the path that they went on to cut rates there was extreme. So here we're not likely to see an accelerated move in terms of interest rate cuts. It will be a little bit more measured than those particular things. And that's because it's an insurance cut, not a reaction cut.

So and I think the jury is still out in terms of whether the US is going to see even more growth weakness going forward. But as Powell highlighted in that commentary, you know, it was really about making sure that they land a soft landing for the US economy, not a hard landing. And that's what they basically looking to engineer out of this particular cut the risk that it now sort of puts forward is and we're starting to see this potentially reflected in the bond market because bond yields are actually selling up. So they're moving higher. And that's on the basis that actually if they loosen policy too much when inflation still has a risk of actually increasing, not necessarily decreasing, then the Fed's confidence around that 2% target starts to diminish and you end up in a situation, well, they're going to hold back in terms of doing those sort of rate cuts so the market can't afford to get ahead of itself. But at this particular stage, a 50 basis point cut is a signal that the Fed and quite comfortable in doing the high fives around the office at the moment in terms of the inflation target places.

Erica Whyte:
So looking ahead, how are we factoring this into our outlook?

Patrick Farrell:
Well, I think we've got to take on board the fact that the Fed have really sort of achieved the target that they're looking for. So what that does do is it provides more certainty in what that monetary policy situation is going to look. So in terms of providing certainty to the marketplace does two things. Equity markets love a more certain outcome. So, you know, the Fed have essentially laid down their cards and they're playing Texas Hold'em. Yeah. You can essentially see what their gambit is, and that's good. So it's good for equity markets in general because of that clarity. But it's also good for other central banks because I think what that does is it allows for other central banks to move in relation to their own monetary policy. Because a lot of people, a lot of central banks around the world have very sensitive currencies. And so when you start to see that when one of the one of the banks is moving in terms of their official rates and the other is not, it actually has a lot of pressure on the currency. So now it actually allows them to now that they've got 50. It actually allows them to sort of have a little bit more flexibility in terms of their own monetary policy settings. So I think what you'll see is that you'll see more interest rate cuts coming through and more stimulus being provided from other central banks. Wasn't the case of the Bank of England.

But I do think in the future we've had some pretty good growth numbers come out and the outlook for the UK is looking pretty good. But we've also got the budget next month. So all those factors, I think it just allows the Bank of England to be a little bit more cautious. But the ECB cut rates this week or last week and we will continue to see that sort of come through.

Erica Whyte:
Patrick, thank you so much for all your expertise here today and we'll see you all again next time. Thanks for watching.