Cautious Fed and Second Wave Fears Drag On Sentiment

Wall Street closed mixed, Asian shares fell overnight and Europe is pointing to a lower start following a reality check from Federal Chair Jerome Powell. The gloomy outlook from the Fed combined with fears of a second wave of coronavirus in the US is keeping the lid on risk sentiment.

Downbeat economic projections from the Fed dashed any lingering hope of a V-shaped economic recovery from the coronavirus pandemic. The Fed expect the US economy to contract -6.5% this year with unemployment to fall to 9.5%. On a more positive note the Fed forecast 5% GDP growth in 2021 along with unemployment of 6.5%. However, the Fed will keep rates at 0 until the labour market recovers in 2022. The message was clear, this will be a long rocky road to recovery, but the Fed has your back. Markets opted to focus on the outlook rather than the support.

OECD sees UK contract -11.5%
The dovish comments from the Fed, coupled with the depressing outlook came hot on the heels of the OECD’s dire forecasts yesterday. The OECD predicted that the UK will suffer the worst damage from the coronavirus crisis from any country in the developed world, with GDP expected to contract -11.5% in 2020, outpacing falls in the US and among European peers such as Germany, France, Italy and Spain. The more draconian measures implemented to curb the coronavirus and the more dependent an economy is on the service sector, the longer the road to economic recovery.

Whilst the FTSE is made up of primarily international stocks, the FTSE 250 is more domestically focused, so we could expect to see the recovery in that index lag behind that of the FTSE 100. The Pound is under pressure against both the US Dollar and the Euro.

There had been a growing disconnect between the economic reality that the global economy is facing and the risk on rally in the stock markets. The Fed’s comments may have given the markets the dose of reality that was needed to start to reduce that disconnect.

Fears of a second wave
Whilst economies across the states continue to reopen fears are growing of a second wave of the virus in the world’s largest economy. Hospitalisations are rising in California, adding to worrying trends in Florida and Texas.

Looking ahead
The economic calendar in Europe is light. The group of Euro Finance ministers will meet today to discuss the EU recovery package. The frugal four are reportedly ready to climb down, potentially offering support to the Euro.

Other than that attention will be on US jobless claims data for further signs of recovery in the US labour market. Continuing applications could give further insight as to the speed at which people are being hired and therefore the strength of the recovery. Disappointment could heighten risk off trading pulling stocks lower whilst boosting US Dollar.

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