Last Thursday, it was the last ECB meeting under president Draghi. Draghi is well remembered for his phrase: ‘whatever it takes’ back in 2012. At that time he wanted to turnaround the euro crisis. Draghi is the first ECB president that never raised rates. With massive Quantitative Easing (QE)programs and uncountable amounts of rate cuts, Draghi has been trying to keep and bring back the inflation in the eurozone at satisfying levels. He has not succeeded in that goal. Some people say the rate cuts and the QE programs did not work at all. I think they probably did work. Without them we might have been in deflation and thanks to Draghi we still have some inflation and an economy that is still quite strong.
Trump is a massive fan of Mario Draghi. Trump wants lower rates and has the opinion that the competition with Europe is not fair, as in Europe governments can borrow money for negative interest rates. Trump probably dreams of firing Powell and hiring Draghi, but Trump will probably not do ‘whatever it takes’ to get negative/very low interest rates
Stocks have been on the way up
Stocks have been rising for three weeks in a row now. Before this week, there had been positivity on the Brexit developments and in the last week the markets seem to have started an end of year rally already, There has been some rumors and reports that the US and China are actually getting closer to sign the partial trade deal that they had mostly agreed on earlier. The S&P 500 is nearing a new high and the NASDAQ has actually reached a new record.
As some earnings, like those from Amazon, have been worse than expected, investors do think that there is no decline yet in the technology growth and are getting more optimistic about the stock landscape again.
Fed can make or break the upcoming weeks
Within days of each of the previous five Fed meetings, stocks have had serious declines.
There was some fear in the markets after the last Fed meetings that the Fed was not doing enough or might be too late in reacting to the trade war escalations. As the trade war escalation has stopped for now, the Fed is still generally expected to cut the rates next week. In case the message they give with cutting the rates is dovish, a nice end of year rally might follow and can bring stocks finally to significant higher levels than we have seen in the last two years. The S&P might be close to a high, since Jan 2018 the Index has been struggling to choose a direction.
Stocks might struggle after the Fed meeting in case Powel signals that the Fed will go on hold for a while. If so, it could mean no more rate cuts are likely for the upcoming time. Rate cuts are generally good for stocks as the yields in bonds and interest rates on banks decline. To fight for yield, stocks get more attractive. Companies can borrow money cheaper and accelerate profitable growth.
Oh yes, Brexit
In the mean time the markets are also waiting for the EU to give the UK an extension on Monday for their exit time. The extension is very likely, the question is how long will the extension be? Most likely it will be an extension of a couple of months. In that case, Boris Johnson will probably call elections that will be held before the end of the year.