When members of the Federal Open Market Committee convene for their final meeting of the year on Tuesday and Wednesday, the fate of the US central bank’s asset purchase programme will be in focus.
Since June, the Federal Reserve has committed to buying $120bn of US government debt each month, with $80bn earmarked for Treasuries of all maturities and $40bn for agency mortgage-backed securities. It is an unprecedentedly large programme, one that has helped to fuel a roughly 70 per cent increase in the size of the Fed’s balance sheet since March, taking the total to over $7tn.
A growing number of investors believe it is time for the Fed to clarify more explicitly its plans for its asset purchase programme. Some think it should shift the bulk of its bond-buying to longer-dated Treasuries to ensure that borrowing costs for American companies remain low.
Fed officials discussed these issues at length at their last meeting on monetary policy in November, but some market participants say the urgency has increased now that 10-year Treasury prices are slipping. Yields have pushed up in recent months towards 1 per cent — a level they have not breached since March.
However, while some investors also point to a waning economic recovery as coronavirus cases surge, others believe the Fed will keep rates on hold this week, especially since financial markets have recovered so robustly since the pandemic wreaked havoc earlier this year.
“A big lesson from 2020 is that the Fed intervenes as circumstances demand, not as the meeting schedule dictates,” said Christian Scherrmann, US economist at DWS Group. “Keeping its powder dry while saying that all tools to support the economy remain on the table may again be the Fed’s modus operandi.” Colby Smith
Lockdowns and travel bans caused Brent prices to plunge to an 18-year low of below $20 a barrel in April and even briefly sent the US benchmark below zero. But this month’s rollout of mass vaccination programmes to combat coronavirus has lifted the oil market as hopes grow that demand for crude will increase next year.
Can the recent rally that has taken Brent prices back above $50 a barrel — the highest since early March — be sustained?
All eyes will be on the oil producers’ alliance between Opec and Russia that agreed in April to end a price war and enact record supply cuts of 9.7m barrels a day to bring the market into balance.
Not only have these cuts started to ease but they are due to taper further in the coming months, leaving a question over the pace at which additional barrels will be added to the market from January.
Some countries such as the United Arab Emirates, a traditional Gulf ally of Saudi Arabia, are looking to pump at a higher level than previously agreed, while Russia is reluctant to lose market share to rivals.
On the demand side, while a pick-up in consumption as the global economy rebounds is likely, it will take several months for the rollout of vaccinations and for the market to return to previous levels. There are also concerns about surging cases of coronavirus, particularly in the US and Europe, and stockpiles that remain high. Anjli Raval
A series of vaccine breakthroughs has injected extreme levels of giddiness into global markets, triggering broad gains across equities, commodities and just about every other variety of risk asset.
Investors have shrugged off rising valuations, political uncertainty in major economies such as the US, EU and UK, as well as rising coronavirus cases, instead looking forward towards a brighter 2021.
This month, in fact, the cyclically adjusted price-to-earnings ratio for the S&P 500 stock index, a valuation measure developed by economist Robert Shiller, reached a level not seen since the dotcom boom.
Absolute Strategy Research has found global investors are the most bullish about the prospects for 2021 than they have been in any year since it began carrying out surveys on sentiment five years ago.
The independent market research shop warned in a new report that markets were veering dangerously towards “groupthink”.
“This crowding of views points to volatility if the consensus stance gets challenged by events,” said ASR. Policymakers should be worried about the “growing gulf” between their cautious macro outlook, and investor expectations for a “vigorous” recovery, ASR analysts added.
Whether or not the sanguine outlook will hold is anyone’s guess. Perhaps a better question is: will the fear of missing out keep investors locked in markets through the rest of 2020 and beyond? Adam Samson & Camilla Hodgson