Last Updated on 27 January 2021 by F.R.Costa

At a time there is a global escalation in trade wars, investors are depositing their hopes on the FED. But the FED just looks empty-handed.

Investors were anxiously waiting for Jerome Powell’s speech at Jackson Hole this morning, to find some reassurances the FED is going to cut rates soon. The key global indexes have been up and down all the week, going nowhere, waiting for this sole moment to give them a direction. But, with the current interest rate at 2.25%, unemployment near record lows and inflation nearing its 2% target, what could the FED really offer?

In my view, not much. And that was exactly what Powell offered. Some cautious words leaving all hopes alive. Considering the latest FOMC minutes, there is a huge disagreement at the committee regarding the direction of monetary policy. Thus, not even Powell knows what follows next. Still the market took Powell’s comments as positive. But, China spoiled the party, by announcing a new escalation on the trade wars with America.

My feeling is that investors are expecting too much from the FED and too little from Donald Trump. There has been a huge escalation in trade wars this year, in particular concerning the China-US trade. Last month, Trump announced another 10% tariffs to hit $300 billion of imports from China. Today, China just retaliated this Friday with a 5 to 10% tariff imposed on $75 billion of imports from the US, including key products as oil and soybeans. China just spoiled the party

While it’s not my goal to debate the political reasons behind this trade war, I believe the economic consequences are becoming obvious. The escalation of this trade war will lead to a global slashing of private investment, an increase in uncertainty, and a renowned demand for liquidity. This will drag demand down and will impact the equity market. With the US general election scheduled for 2020, I believe Trump will attempt to approve some fiscal stimulus in a desperate attempt to counterbalance the negative impact of the trade war. He has also been pressing the FED to act. But, the FED, as many other central banks around the world, has very few options in terms of conventional measures. The interest rate is too low for a late cycle economy. If the FED starts cutting its key rate before any material reason to do so, it may be unable to avoid the worst later, when most needed. At the same time, inflation is nearing the 2% level, which should weight negatively on a potential rate cut. Additionally, Jerome Powell seems clueless regarding what monetary policy has to offer as a means of stabilisation tool for a trade war scenario.

After rising modestly to 26,300 points, the Dow is now 500 points down, as investors are anticipating a bold retaliation from Trump to the announced Chinese tariff.

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Dow was hit by Chinese tariffs and Trump’s retaliation promises.

With all the above in mind, I believe we’re going through tough times for equities. I don’t expect much action from the FED, as there is not much that can be done and giving the tone on Trump’s words, the only side that makes me sleep at night is the sell side. Oil markets will also be hit.

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About F.R.Costa

Filipe has more than 20 years experience with financial markets. He holds a degree in Economics with a specialisation in Finance and he's currently finishing a PhD in Finance. He used to work as financial consultant and research associate but then decided to return to academia five years ago. Since that, he has been an Invited Lecturer, teaching courses on Investments, Financial Markets, and Monetary Economics. He is also a regular contributor writer at The Master Investor Magazine.

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