Is the US market overheating?

Nevertheless, Chairman Jerome Powell keeps telling everyone that his attempts to stabilise the funding market cannot be considered as Quantitative Easing.

BACK in October of 2019, the US Fed began buying $60bil of Treasury bills per month, causing a substantial increase in not only its balance sheet but also the overall global money supply.

Earlier last week, we received the news that the Federal Reserve Bank of New York added $52.6 billion in short-term liquidity to the financial system on Friday to help money markets get through the weekend.

Nevertheless, Chairman Jerome Powell keeps telling everyone that his attempts to stabilise the funding market cannot be considered as Quantitative Easing.

No matter what we call it, there is a direct effect on the stock market. According to Deutsche Bank, since the Fed started buying T-bills, the S&P 500 has gone up by almost 1% for every 1% increase in the Fed’s balance sheet.

In this context, the question should be raised: does it mean that the market is going to fall once the T-bills purchased is turned off?

Back in 2011, the Fed suggested that it wouldn’t expand its asset purchase program preceded a 19% drop in the S&P 500. Thus, it becomes obvious that one of the main risks in 2020 is the end of monthly purchases.

Meanwhile, the Dow Jones and S&P hit new records, with the ratio of the Dow Jones Industrial Average to the price of gold reaching levels of the Great Depression.

Many investors see it as a sign that the US markets are overheated and begin to lose energy.

Still, it does not mean that the trend reversal is almost here, at least because of the good macroeconomic data and some progress in terms of trade conflicts resolution and, of course, Brexit.

First thing first, we find it important to mention that a phase one US-China trade deal has been finally signed.

However, it appears that tariffs on Chinese imports would most likely stay in place until the US November elections.

Besides that, the US Senate approved the USMCA trade deal amid impeachment proceedings. Mexico has also passed it, so now it is up to Canada to ratify the US-Mexico-Canada agreement for it to take effect. We might probably see it at the end of January.

Another significant event, which slightly affected the Moex Russia Index, was the resignation of Russia’s government on Wednesday to make way for major new constitutional changes.

In terms of the macro data, we can highlight:

• Home mortgage apps improved by 16.0%, whereas refinance apps rose 43% w/o/w, above the previous increase of 5.0%.

• Retail sales rose 0.3% m/o/m, above the expected 0.2%.

• Import prices rose 0.3% m/o/m, meeting expectations.

• An index of factory activity in the mid-Atlantic region registered the highest level in eight months and the outlook is the brightest in more than a year and a half, whilst weekly jobless claims fell to their lowest level in over a month.

• The January Manufacturing Business Outlook Survey indicated growth in the region’s manufacturing sector this month. To be more precise, the diffusion index for current general activity increased nearly 15 points this month, from a revised reading of 2.4 in December to 17.0.

• Baker Hughes reported that the number of active U.S. rigs drilling for oil increased by 14 to 673 this week. According to Baker Hughes, the total active U.S. rig count, meanwhile, was up 15 from last week to 796. This news followed some decline in oil prices.

• German GDP expanded 0.6% in 2019 versus 1.5% in 2018.

• The UK consumer price index gained 1.3% in December, the least since November 2016. Poor UK economic data suggests that Bank of England may cut interest rates at the January 30 policy meeting. Currently, the probability of a 0.25 reduction in the benchmark Bank Rate, from 0.75% to 0.50%, rose to 80%.

• Finally, yet importantly, we received more or less positive data from China. Its economy grew 6.0% in the fourth quarter of 2019 from a year earlier, in line with expectations. As a result, markets saw some improvement and that is despite the fact that it’s the lowest growth rate since 1990.

Market Snapshot

SPX + 1.97%, Nasdaq Composite +2.29%, DJI +1.82%, S&P 500 Volatility Index -3.66%, UKX +1.14%, Dax +0.32%, Nikkei +1.27%, Hang Seng Index +1.46%, Imoex +2.34%, and Euro Stoxx 50 +0.49%.