Fundamental Analysis

Risk Sentiment Improves Ahead of Fed Minutes

  • US markets were closed for the Presidents’ Day holiday, reducing volatility.
  • The STOXX 600 in Europe increased by 0.1%.
  • Investors are awaiting the core personal consumption expenditures index, the Fed’s favored inflation gauge.

Global equities prices increased slightly on Monday during the London trading session as a US holiday dampened volatility ahead of the most recent Federal Reserve meeting minutes. On course to experience its biggest monthly gain since September, the dollar softened a little, signaling a decrease in investor risk aversion.

Non-US assets experienced some relief from the prior week’s pressure since US markets were closed for the Presidents’ Day holiday.

The STOXX 600 in Europe increased 0.1% as gains in mining shares offset a decrease in the IT sector, contributing to the MSCI All-World index’s 0.2% gain.

A burst of US statistics revealed the world’s largest economy is holding up much better than expected, which implies interest rates will have to increase further and take much longer to decrease, putting an abrupt end to a rally in both stock and bond prices in the initial six weeks of the year.

Investors are beginning to acknowledge they may have been excessively optimistic in their assumptions after dismissing warnings from US officials that inflation is too high and too persistent for comfort.

According to JPMorgan’s Mislav Matejka, head of global and European equity strategy, it might be premature to conclude that recession is currently off the table, given that Fed will have done 500bp+ of tightening in a year. The effect of monetary policy tends to be seen with a lag on the real economy of as much as 1-2 years.

Nasdaq and S&P 500 futures both decreased by 0.2-0.3%. On Friday, the S&P dipped to a two-week low.

The minutes of the Fed’s most recent meeting will be made public on Wednesday, but they might have a smaller impact than usual because the meeting was held after January’s strong payrolls and retail sales figures.

Fed's inflation gauge (Source: Bloomberg)
Fed’s inflation gauge (Source: Bloomberg)

The core personal consumption expenditures index, a favorite inflation gauge for the Fed, will be released on Friday. While the annual growth rate is anticipated to have dropped to 4.3%, January’s estimated increase of 0.4% would be the most significant gain in five months.

Major retailers Walmart and Home Depot are scheduled to provide updates on the state of the consumer this week as the earnings season continues.