Scoreboard: Fed conjecture

New Fed speculation arises as the market searches for direction, while euro sceptics strike out in Germany's election.

It’s hard to get a sense of how markets might travel this week. I think investors are still dealing with the disappointment of the non-taper and trying to work out when it might actually take place. The Federal Reserve is certainly taking a lot of flak over the decision – not because it’s well overdue, but because many feel they were misled. I can’t say I agree with that view though and I find myself in the unusual position of defending the Fed. To be frank, I think it was very vague in the lead up, there was a lot of indecision expressed in the Fed rhetoric and Bernanke had outlined quite clearly under what conditions it wouldn’t taper. How it came to be that September was a done deal I don’t know, but in my opinion, it had nothing to do with anything the Fed said. Not really helping, St Louis Fed President James Bullard said on Friday that the decision was ‘borderline’ and that the taper could start in October.

Anyway, with markets left wondering about that and not much else in the way of news flow, picking the dominant market moving theme for this week is difficult. It doesn’t look like it’s going to start well whatever the case, and stocks on Wall Street ended weaker on Friday — quite a bit weaker with the S&P500 off 0.7 per cent (1709), the Dow down 185 points (15,451) and the Nasdaq off 0.4 per cent (3774). Few reasons for buying I guess as markets digest Bullard’s comments and correct a little from the non-taper euphoria. There’s also renewed talk of the debt ceiling debate and that, while probably not causing any angst, isn’t exactly a reason to buy stocks either — especially when they’re up near record and everyone’s on about stretched valuations. By sector, basic materials, telecommunications and utilities were the hardest hit sectors, each down around 1.3 per cent — although all ended in the red.

Now over in Europe, falls were a little more modest, with the Dax off 0.2 per cent and CaC off 0.1 per cent, although the FTSE100 fell 0.4 per cent. The main news of course is the German election and it looks as though Angela Merkel won a fairly decisive victory. Now this is quite something, because if she does indeed pull lift off, and all indications are that she will, she would be the first Chancellor in about 50 or 60 years to win a third term. For the Christian Democrats as a whole, it’s best result for a party since reunification. Euro sceptics, the ‘kicking the can brigade’ need to take note of this result. It is significant, because all investors have read is how resentful the Germans have become about saving Europe – that’s not what this election result shows and in fact it is a huge endorsement of the Chancellor’s approach. That the FDP lost its position in the lower house – for the first time since 1949 – is also telling and shows the German people are committed to Europe, the bailouts and closer integration. What you would expect to see from that is a stronger euro, and a decent bid for European stocks tonight – the election result is a very positive signal for the eurozone as a whole. So far the euro is only about 20 pips or so high from Friday (1.3546). There is a possibility that this could spark some buying activity tonight. But otherwise all the signals are bad.

It’s noteworthy that commodities were belted again on Friday night – gold down $36, silver off 5.9 per cent, copper down 0.8 per cent and crude fell 1.6 per cent to $104.7. The Australian dollar is also weaker at 0.9372 from about 0.9440 – none of which is great for our market and indeed the SPI suggests Aussie stocks will fall 0.4 per cent today.

So as you can see its cross road territory at the moment – and the dataflow this week won’t really provide any guidance. Most of it concerns manufacturing or sentiment indicators – German IFO, the European PMIs and the like. Otherwise we get another estimate of US GDP. For Australia there is little. The Reserve Bank’s Financial Stability report might get some attention given recent chatter over lending standards, but that’s it really.

Have a great week.