Market news | 30 August, 2019

Investors are holding fire from the central banks

Alberto Villasán Investment and Markets Director

The global economic deterioration forces to lower the reference rates

The global economic downturn has once more obliged the U.S. Federal Reserve (Fed) to change its monetary policy and begin to cut its official rates.

Investors are holding fire as they wait for decisions from the central banks…

Somewhat surprisingly, we’re still seeing global investors paying an inordinate amount of attention to the decisions from the central banks in general and the Federal Reserve in particular.

In recent quarters there have been compulsive moves in the financial markets as they react to decisions and messages from the central banks, and in many cases, this has impacted decisively on short-term horizons.

These moves can be extremely violent, prompting the excellent buying conditions witnessed last year when share prices fell by more than 15% during the course of December.

… due to their influence on asset valuations

The reason why financial assets are so sensitive to the official rates of developed nations is that investors analyse and perceive their valuation in the same relative terms as other investment options.

For example, a 10-year bond with an annual yield of 2% will be more or less attractive depending on whether the official rate and bank deposits offer a higher or lower yield than 2%.

Financial asset valuations (stock exchange, bonds, etc.), and even non-financial ones (real estate) are currently riding high because the investment alternatives, such as official rates and deposits, are offering very low yields.

Investors themselves are taking for granted or anticipating a dip in the benchmark rates by the Federal Reserve, so we might see renewed volatility if this doesn’t happen or even if it takes longer to materialise than currently expected.

Accordingly, we should pay very close attention to Powell’s declarations in the coming weeks, as well as to how other investors interpret them and their possible repercussions for the financial markets.

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