Central banks continue to prop-up markets


The tsunami of money has been unprecedented and is the main reason equity markets have performed as they have.

The stimulus measures have been at their largest in the US, where money growth has shot up to 25% for the year. In the Eurozone and the UK, it is a lively but more modest 10%. In the US, the accumulation of large money balances within the financial sector has led to substantial investment purchases of financial assets, with institutions buying more shares as the Federal Reserve tempts them to sell some of their bonds to assist the vast quantitative easing purchase programme.

In the last couple of weeks, there has been a marked slowing of the pace of the official purchases on both sides of the Atlantic, as central banks think they have done enough to overwhelm the gloom of markets in late March and to return interest rates and asset values to levels they feel happier with. This implies more of a two-way market from here, with perhaps less indiscriminate buying. It has not yet led to a major sell-off, as many market participants assume the Fed and the others would want to stop any sharp falls as they did in March. There are also probably still portfolio managers with more cash than they feel comfortable with for a rising market.

Some say the market from here will be dictated by the Covid-19 narrative. We ourselves tore up the conventional scenarios for 2020 early in the virus spread and based our outlooks for this year and next on the duration of the lockdowns, the likelihood of the virus retreat and the danger of a second wave. These will be the main factors that affect the outturns for output and profits and will be one of the primary drivers of business and investment news flow for the rest of 2020.

View Full Article – published by Charles Stanley on 30th June 2020