New York, Sep 25 (BUS): The Federal Reserve’s indication that it will soon dissolve its bond-buying program reinforces the case in financial markets for so-called deflation trading, which has raised Treasury yields and boosted shares of banks and energy companies. and other economically sensitive companies in the first months of 2021.
Deflation trading stopped during the summer. But the central bank said this week that it will likely begin to roll back its $120 billion a month government bond-buying program as soon as November, while also signaling that it may raise interest rates in 2022, sooner than many expected, According to Reuters reports.
Although monetary tightening is often seen as a drag on stocks, some investors view the Fed’s stance as a vote of confidence in the US economy.
said Ralph Bassett, head of North American equities at Aberdeen Standard Investments.
The Russell 1000 Value Index, where business contraction stocks are most heavily represented, is up 0.9% since the start of the quarter, well behind the 5.7% gain in the Russell 1000 Growth Index over the same time. The value index is up 17% year-to-date with the growth index up 19%, compared to an 18.7% rise for the S&P 500.
Market watchers also closely watched Treasury yields, which have risen since the Fed meeting as strong growth expectations and inflation fears drove some investors out of safe government bonds.
The benchmark 10-year US yield recently settled at 1.45%, close to its highest level since the beginning of July. Higher yields on Treasuries make some stocks less attractive.
Analysts at UBS Global Wealth Management said the 10-year yield would rise to 1.8% by the end of the year but they don’t believe such a move would disrupt stocks. The pace of any rally will be key: the bank’s research shows that a three-month change in nominal returns between 50 and 100 basis points has been accompanied by a 5.7% return in the US MSCI index since 1997.
“Only an increase in real yields of more than 50 basis points over three months is likely to affect equity returns, particularly in emerging markets,” the bank said in a report.
Investors will be watching a slew of US economic indicators next week, including durable goods orders and the ISM manufacturing index, as well as progress in the debt ceiling negotiations in Washington.
Investors will also be watching developments in the Evergrande saga, after the debt-laden Chinese company missed a dollar bond payment deadline this week, leaving global investors wondering if they should swallow up big losses when the 30-day grace period expires.
Margaret Patel, portfolio manager for equity and fixed income funds at Wells Fargo, said the Fed cut should benefit higher-yield bonds because it signals a stronger economy that will reduce corporate defaults.
The trend in the number of coronavirus cases in the United States will also affect financial markets, said Jim Poulsen, chief investment analyst at Leuthold Group. The emergence of COVID-19 earlier in the year helped undermine expectations for the economic recovery of the United States.
“We know where to go during the reopening cycle,” he said, referring to value stocks and smaller stocks.
The current moving average of the number of cases in the United States for seven days is now 146,182, an increase of 6.1% from the previous seven days, despite a 1.8% decrease in the number of tests that have tested positive for the virus, according to the Centers for Health Care. Disease control.
Meanwhile, analysts at Capital Economics said investor confidence in the economy could be affected by the prolonged fight over raising the US debt ceiling.
The US Senate is days away from voting on a measure to suspend the $28.4 trillion debt ceiling and keep federal agencies running after September 30, the end of the fiscal year.
“Next week the focus will shift to fiscal policy. The debt ceiling crisis in late October may delay even the Fed’s phased plans,” Capital Economics said in a report.