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The global economy is going through a tough time as prolonged trade-related disputes, decline in the manufacturing sector due to lack of export demand and several geopolitical concerns have resulted in an economic slowdown. Several major central banks have cut the benchmark interest rate and injected stimulus in order to restore growth. The latest one in this league is the European Central Bank (ECB).
ECB Injects Massive Stimulus
On Sep 12, the ECB cut its main deposit rate by 10 basis points to -0.50%. This simply means that commercial banks need to pay the ECB to hold their overnight excess cash balance. This was the first rate cut by the central bank since early 2016 despite the fact that the benchmark is already in negative territory.
However, the central bank left two other major benchmark rates unchanged. Rate on main refinancing operations and the marginal lending facility remained same at 0% and 0.25%, respectively.
However, the ECB eased the terms of its long-term lending facility through which some banks will avail loans at a cheaper rate. Additionally, introduction of a tiered system by the ECB will enable struggling banks to be exempted to pay to the ECB while holding overnight excess cash balance with it.
Meanwhile, the central bank of the Eurozone reintroduced the quantitative easing program. Effective Nov 1, the ECB will purchase €20 billionn of bonds each month from banks in order to improve liquidity in the systems so that Eurozone banks can lend morer to their clients. Per the governing council of the ECB, this asset purchase program will continue “for as long as necessary to reinforce the accommodative impact of its policy rates.”
Notably, this was the last meeting of the ECB under their President Mario Draghi before he hands over the baton to the former managing director of the International Monetary Fund Christine Lagarde.
Fed is in Focus
The market has assigned a high chance for the Fed to reduce the benchmark leading rate again in September after doing the same in July, for the first time in 11 years. Fed Chair Jerome Powell reiterated several times the central bank’s commitment to act as appropriate to sustain U.S. economic expansion.
The Fed has corrected itself since the beginning of 2019 and adopted a dovish monetary stance after aggressively following hawkish policies in 2018, which were largely blamed for a market rout along with trade-related concerns.
Year to date, Wall Street is continuing its dream run with the Dow, S&P 500 and Nasdaq Composite up 16.5%, 20.1% and 23.5%, respectively. This impressive performance is primarily owing to the central bank’s stable and accommodative monetary stance despite severe concerns about reaching a trade deal with China.
Despite strong consumer spending, the U.S. manufacturing sector, which accounts for 12% of the GDP, is facing weakness due to the ongoing tariff war. Business confidence has declined and inflation remains muted. All these negatives are likely to compel the Fed to cut rate again this month.
At present, the CME FedWatch has assigned 88.8% probability of a 25 basis-point cut and 11.2% chance of a 50 basis-point rate cut. Respondents have also assigned 48.4% chance of a third rate cut of 25 basis points in October.
Likely Gainers
The second rate cut by the Fed is likely to further fuel Wall Street’s rally in September. While several stocks will benefit from the dovish stance of the central banks, a selection of winners may be difficult. This is where our VGM Score will do the trick.
We have narrowed down our search to five such stocks that skyrocketed in the past month despite market mayhem in August and still have upside left. Each of our picks carries a Zacks Rank #1 (Strong Buy) and a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our five picks in the past month.