S&P 500, DAX, FTSE 100 Fundamental Forecast: Eyes on Fed, ECB and BoE

S&P 500, DAX and FTSE 100 Equity Analysis and News

• S&P 500 | Federal Reserve Key to Record High Test

• DAX | Markets Dont Believe the ECB Has What it Takes

• FTSE 100 | Bank of England Remain on Sidelines Despite Hawkish Hints

S&P 500 | Federal Reserve Key to Record High Test

Calls for the Federal Reserve to loosen monetary policy have grown louder and louder since the breakdown in trade talks between the US and China in May with little to suggest that a deal will be struck in the short term. Alongside this, US data has also continued to weaken with a poor NFP report and slightly softer inflation report raising expectations that the Fed could begin to signal to ease policy (in the form of rate cuts).

As shown in the graph below, what has been apparent is that markets have gone back to the old mantra that “bad news is good news for equities”, given that weaker data will push the Federal Reserve in the direction of loosening monetary policy.

Fed Are All Talk, Equities Need Action

Next week will be critical for the short-term outlook for US equities with investors largely focusing on the FOMC meeting, where the Federal Reserve could signal an easing bias to tee up a rate move at the July meeting. As it stands, Fed Fund futures are fully priced for a rate cut in July with another 25bps cut seen happening by October. Provided the Fed signals that rates could be on the way back down, risks are on the upside for equity markets in the near term with the S&P 500 challenging record highs. However, failure to meet the dovish expectations priced in by signaling that there is not a strong case to make an imminent move could see the S&P 500 back below 2800.

S&P 500 Price Chart: Daily Time Frame (Apr 18 – Jun 19)

DAX | Markets Dont Believe the ECB Has What it Takes

At last weeks post ECB press conference, President Draghi noted that some members had talked about rate cuts, QE resumption and extending the forward guidance. This view had also been backed up by ECB member Olli Rehn. However, eyes have been on Eurozone inflation expectations, which have been falling at an alarming rate and now hovers around record lows at 1.19%. As such, this suggests that the markets essentially dont believe the ECB has enough fire power to reflate the economy and handle an economic downturn. Consequently, in light of the plunge in inflation expectations eyes will be on commentary from Draghi next week at Sintra, which could provide new clues to the outlook of monetary policy, particularly given that money markets are pricing in 70% chance of a 10bps cut by the year-end.

Following the break above the descending trendline from the 2019 peak, the DAX is now eyeing a test of the 12300, in which dovish policy signals from the likes of the Fed or ECB opens up a move towards YTD highs at 12460. Support is situated at 11900 and 11600.

DAX Price Chart: Daily Time Frame (Dec 2017 – Jun 2019)

FTSE 100 | Bank of England Remain on Sidelines Despite Hawkish Hints

Over the past week, the BoE hawks had been out in force with Haldane and Saunders both signaling that rates could rise faster than what the market expects. However, while this may raise the possibility that there could be a hawkish dissenter in the upcoming meetings, the bottom line is that the BoE will likely remain on the sidelines as long as Brexit uncertainty persists.

Source: DailyFX, Hawk and Dove meter

Aside from the BoE, eyes will be on the Conservative leadership contest (Tory Contest timeline). As it stands, the candidate to beat is Boris Johnson who steam-rolled the first round, which in turn, as odds increase for Boris Johnson to become the next Prime Minister, no-deal risks will also pick-up, given that the Tory MP is willing to leave the EU by October 31st with or without a deal. As such, the FTSE 100 may outperform the domestically focused FTSE 250 in such case.

FTSE 100 Price Chart: Daily Time Frame (Mar 2018 – June 2019)

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--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

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