The Monday Report

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By Greg Peel

Well that proved short-lived.

The alarm bells were ringing when Wall Street shot up on Wednesday on the Fed’s assessment the US economy was still too weak to justify QE tapering. Were new all-time highs really the sensible response to the underlying reality? According, independently, to billionaire investors Warren Buffet and Carl Icahn, no they were not.

Buffet in particular has the power to move markets but one might argue that at the end of the day, most on Wall Street could come up with their own argument not to taper. Particularly worrying is the drop in the participation rate with respect to unemployment to levels not seen since the long recession of the 1970s. This drop renders any decrease in the official unemployment rate misleading. This drop does not suggest improvement in the US economy by any stretch.

But Wall Street had been led to believe tapering would begin anyway. Bernanke can make all the excuses he likes about never having specifically stated tapering would begin, and reaffirming that any decision remained data dependent. He did not stop the market from spending three months setting itself up for tapering, which to all and sundry meant silent confirmation. On Friday, Dallas Fed president Esther George echoed many in the market by suggesting the Fed has lost credibility as a result. George was the one FOMC member of ten to vote against the decision to hold off on tapering.

George’s comments were dismissed by another FOMC member, St Louis Fed president James Bullard. Indeed, Bullard suggested the Fed had gained credibility by holding off while the data remained unconvincing. Whether or not his argument is tenuous, Bullard went on to suggest that tapering still might begin as early as October.

One wonders whether the FOMC has simply lost the plot altogether. Bernanke is quickly undermining his opportunity to depart a hero.

The Dow fell 185 points or 1.2% on Friday while the S&P lost 0.7% to 1709 and the Nasdaq dropped 0.4%. The S&P is now below where it was after Wednesday’s jump but still managed to post a positive week, making three in a row. There was nevertheless more in play on Friday than just the tapering debate.

It was quadruple witching, when all of stock futures and options and stock index futures and options expire ahead of the end of quarter. This in itself is enough to increase volume and often volatility. Throw in an S&P 500 index rebalancing and promotion and relegation in the Dow, and the scene was set for a lot of pushing and shoving. It seems the pushers overcame the shovers.

Watching on the sidelines, bemused, were the forex and bond traders. The US dollar index remained relatively flat at 80.44 while the US ten-year bond lost only 2bps to 2.73%. The same was not true for gold nevertheless which, having shot up US$50 on the “no tapering” announcement, fell US$40.80 to US$1325.50/oz on Friday on Bullard’s suggestion October could yet be the start.

Base metals similarly reversed their earlier response, with copper down 0.6% and the rest of the group falling 1-2%. The oils were mixed, with West Texas falling US$1.05 to US$104.81/bbl but Brent rising US54c to US$109.22/bbl. Spot iron ore was again closed for the Chinese holiday.

The Aussie fell 0.5% to US$94.00 and the SPI Overnight dropped 23 points or 0.4%.

It has been confirmed this morning not only did Angela Merkel’s Christian Democrat party win yesterday’s German election with a handsomely improved position, it appears to have gone very close to being able to form a government alone, without the need for a coalition. Either way, the Christian Democrat vote exceeded the votes for the next biggest winner, the Social Democrats, by two to one.

There will be a sigh of despair from the peripheral eurozone members who know they are now stuck with strict austerity. There will be relief from global financial markets that stability will be maintained, even if most believe austerity is more a part of the problem rather than the solution.

As we move into the new week, which for all intents and purposes represents the end of the September quarter, US fiscal issues begin to come into focus. The dreaded debt ceiling debate will soon be upon us. The potential for Congress to provide an impediment to the US economic recovery is another reason cited as to why the Fed held off, and perhaps why Bullard believes October could still be the date if the debt issue could be swiftly dealt with.

Closer at hand, today is flash PMI day, with estimates due for September manufacturing PMIs from China (HSBC), Europe and the US.

There will be plenty of data for Fed-watchers to mull over this week in the US, beginning with tonight’s Chicago Fed national activity index. Tuesday brings the Case-Shiller and FHFA house price indices, Conference Board consumer confidence and the Richmond Fed manufacturing index, and Wednesday sees durable goods orders and new home sales.

On Thursday the first estimate of US June quarter GDP will be revised, with the market anticipating a rise to 2.7% from the initial 2.5%, which was itself higher than expected. Pending home sales numbers are also due, and Friday wraps up with personal income and spending and the Michigan Uni fortnightly measure of consumer sentiment.

The UK will also revise its first estimate of June quarter GDP on Thursday. China will release monthly property prices on Friday. Japan is closed for business today.

It’s a quiet economic week in Australia, with the RBA’s Financial Stability Review due on Wednesday the highlight. Thursday will bring the expiry of stock options on the ASX.

There’s another round of ex-div activity this week, with the concentration being today. Kathmandu ((KMD)) will release its full-year results tomorrow, David Jones ((DJS)) and Nufarm ((NUF)) on Wednesday, Gindalbie Metals ((GBG)) on Thursday and Funtastic ((FUN)) on Friday.

Rudi will appear on Sky Business today at 11.15am, on Wednesday at 5.30pm and on Thursday at noon and again between 7-8pm for the Switzer Report.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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