Investment managers view the Federal Reserve’s first rate cut since 2008 as a relatively isolated event and not as the start of another phase of quantitative easing that would power equity markets higher.
The 25 basis-points cut in the Fed’s benchmark rate on Wednesday was described my some commentators as an “insurance cut” for a US economy that is doing well but which has some areas of weakness and could be affected by global uncertainties, such as trade war and Brexit.
Esty Dwek, a global market strategist at Natixis Investment Managers, said markets “struggled to adjust” to the Fed governor Jerome Powell’s wording between defensive cuts and still healthy US economic growth. Dwek noted that the S&P500 index retreated, US two-year yields climbed, the dollar strengthened, and emerging market assets and gold ”suffered”.
“We maintain our exposure to risk assets, still believing it is too early to take all risk off the table, but too late to become overly aggressive,” Dwek said.
Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income, said risk assets, which includes equities, appeared moderately disappointed and that fixed income and particularly US Treasuries – which are of much lower relative risk – will continue to hold a “very valuable place in a balanced portfolio today”.
Lee Ferridge, a multi-asset strategy specialist at State Street Global Markets said Powell’s statement and subsequent press conference “appeared designed to rein back market expectations of another three cuts to come over the next 12 months”.
He said the Fed is concerned by recent data showing a slowdown in parts of the economy and may now be in wait-and-see mode to see if its fears over the trade war and global slowdown come to fruition.
“This less dovish message is likely to see short rates rise and the yield curve to flatten. It is also likely to see the USD gain further, while equity markets are unlikely to welcome the reduced prospects of more rate hikes to come,” Ferridge added.
Antoine Lesné, a regional head of strategy and research at SPDR ETFs, which is also part of State Street, said the equity markets’ reaction “may not be too pleasant, especially as earnings surprises are relatively low and more accommodation may be needed to push asset prices higher”.
As an alternative, Treasury bills could be a “place to be” in, as they still exhibit a decent yield and the Fed’s rate-setting committee seems in less of a hurry to “cut it down”.
Andrew Mulliner, global bonds portfolio manager at Janus Henderson Investors, said the Fed cut was widely expected and that another Fed action that accompanied the rate cut – halting the reduction of its balance sheet by selling bonds off two months earlier than originally planned – ended “any expectation that the age of gargantuan central bank balance sheets and substantial bond market ownership might just have been temporary”.
He added that investors hoping for Fed comments that would prop up stocks and support lower bond yields and spreads were left disappointed.
“Powell characterised the Fed’s attitude to the easing of policy as a mid-cycle correction and whilst further cuts cannot be ruled out, it seems clear that the Fed has no interest in feeding already heightened expectations of monetary policy support to investors when equity markets are near all-time highs and bond markets already price substantial additional easing,” said Mulliner.
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