Scoreboard: American express

US stocks pushed higher overnight, the S&P500 approaching its recent record with a 0.4 per cent rise overnight to 1704. The Dow for its part was up 35 points (15,529), while the Nasdaq rose 0.8 per cent (3745). That was the extent of the good news though, as everywhere else it was a sea of red. European stocks for instance fell 0.2 per cent on the Dax and CaC, while the FTSE100 fell 0.8 per cent.

I would have thought, however, that the European stocks had every reason to rally. German investors are certainly optimistic about things and the ZEW survey showed a surge in sentiment for September, the economic sentiment index spiking to 49.6 from 42 – its highest level since April 2010. The current situation itself index shot up to 30.6 from 18. In both cases these indexes are well above average and show the sentiment of German finance professionals at very high levels.

It seems that European markets were hit by some poor car registration data from the European Union which is the lowest in about 20 years. So all the big car manufacturers were hit hard and there in the UK Lloyds was hit hard after the government’s decision to sell 6 per cent of its stake.

Elsewhere gold (-$7.6 to $1310), silver (-1 per cent) and crude (-1 per cent to $105.5) were weaker on a combination of easing Syrian fears, taper talk, and in the case of crude, an announcement from Libya that production was rebounding following disruptions due to labour disputes.

Why the US outperformance then? Well consumer services, financials and tech stocks led gains for the session, but gains were otherwise broad-based – energy, industrials and telecoms also doing well. I suspect it might be the growing view that if the Federal Reserve does announce a taper this month, it will be modest, and of course there is always the chance they don’t taper.

The absolute certainty expressed by some investors that the Fed will taper this week points to some private discussions with Fed officials here (not publically available information). In contrast, the Fed’s public rhetoric points to a strong chance they don’t taper at this meeting – so maybe that’s what gave stocks a boost.

Alternatively the market is just over it and focussing on the good economic news, although there wasn’t anything out overnight – only US inflation figures showed headline inflation moderating to 1.5 per cent year-on-year in August from 21 per cent year-on-year, although core inflation accelerated to 1.8 per cent year-on-year from 1.7 per cent. The NAHB housing market index was also out, but this was unchanged.

I’m finding the domestic economic discussion much more interesting at the moment, and increasingly unreal. On the same day, we have demands from Australia’s retailers that the Reserve Bank should cut rates again – Solomon Lew is apparently calling for 50 bps – and warnings of a looming house price bubble. Incredible.

Firstly with record low interest rates a bubble is a very high risk – it always was going to be and policy makers should have been alert to this fact in the first place. This was always the reason I was firmly against cutting rates into record low territory when it wasn’t needed. Simply to try and bring the exchange rate down? How has the country actually benefited from that? Our retailers are still whining and don’t appear to be even aware of the fallacies of their own arguments. That is, if record low rates aren’t stimulating consumer spending, what will another 50 bps achieve? Developers are still not building houses, and non-mining investment is still at multi-decade lows.

That the Reserve Bank, APRA – and others – now feel compelled to warn about risky lending or other distortions in the housing market is utterly absurd. This is especially the case as it is often accompanied by, in the same breath, calls for further rate cuts. In my view it reflects nothing more than the worst of policy failures and a serious lapse in judgement. We shouldn’t be in this position – after the GFC only a some years ago – a housing bubble here shouldn’t even be a risk. I warned some time ago that the only way forward from here would be increased regulation and this is now the call from people like Garnuat and others. How easily the lessons of the past are discarded. 

Adam Carr is a leading market economist.

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