Fed and ECB Pivotal to Short-Term Price Action


S&P 500 and DAX Equity Analysis and News

  • S&P 500 | Federal Reserve Key to Record High Test
  • DAX | Markets Don’t Believe the ECB Has What it Takes

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.

S&P 500, DAX Outlook: Fed and ECB Pivotal to Short-Term Price Action

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)

S&P 500, DAX Outlook: Fed and ECB Pivotal to Short-Term Price Action

DAX | Markets Don’t Believe the ECB Has What it Takes

At last week’s 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 don’t 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.

S&P 500, DAX Outlook: Fed and ECB Pivotal to Short-Term Price Action

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 (Nov 2018 – May 2019)

S&P 500, DAX Outlook: Fed and ECB Pivotal to Short-Term Price Action

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— Written by Justin McQueen, Market Analyst

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

Follow Justin on Twitter @JMcQueenFX



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