SCOREBOARD: Frayed nerves

Initially, it looked as though we might be in for another decent session. Stocks in Europe opened higher, bonds were generally selling off and commodities saw some modest buying – happy days. It wasn't to last though and, in fact, it didn't last long at all. A number of factors weighed in here. Firstly, rumours are flying around that Germany is at risk of losing its AAA status, which isn't something I would have thought would be in any way credible, but nerves are frayed. Then there were pre-announcement rumours that a number of European nations (France, Italy, Spain and Belgium) were going to extend short-selling bans, which as it turned out was spot on (the bans will be in place till late September/October apparently). It was carnage after that and the Dax subsequently slumped 4 per cent in fifteen minutes, recovering some of that to still close down 1.7 per cent. The FTSE wasn't much better, falling 1.4 per cent.

Across the Atlantic we saw a similar pattern – Wall Street bid at the open, up 1.2 per cent at the high, but offered shortly after, with the S&P closing just off its lows at 1159 or down 1.6 per cent. Energy, consumer services and industrials were hardest hit but no sector was spared in the end (not even financials after Warren Buffet's $5 billion purchase of BoFA stock). The Dow was then off 170 points (11149), the Nasdaq fell almost 2 per cent (2419) and locally, the SPI was down 1 per cent (4170).

There was just no good news at the end of the day and while you don't need much in the way of bad news to see stocks tumble, it seems the hurdle for a bid is very high. Jobless claims didn't help the situation, rising by about 5,000 in the week to August 20, although the Verizon strike was largely responsible for this rise and in the absence of that, you're probably looking at claims around the 400,000 mark, which isn't too bad at the end of the day. At the very least it shows that through all the wailing and gnashing of teeth of late, US companies aren't sacking staff. I mean, why would they? US consumers are spending at a rapid clip, industrial production is robust etc. Things aren't too bad at all.

This of course is a problem for Helicopter Ben and those gagging for another hit of free money. Well, that, and the fact that inflation has spiked higher in 2011 while yields are already at record lows. I don't doubt for one second that the extreme core at the FOMC (Bernanke, Dudley and Yellen) would still love to print more money and a few of their Democrat leaning brethren have expressed vocal support for further measures. The problem of course is that wiser heads at the Fed have dissented. There were three dissents at the last meeting which is the highest number for a couple of decades and pretty much as close as you can get to rebellion.

One commentator, who claims great connections at the Fed, suggests that if Bernanke did push QE3 then the number of dissenters would rise to five and with ten voters, that's a fairly big problem. There were a number of other news articles out also playing down the prospect for QE3 (from the Wall Street Journal and Bloomberg). Fact is that Bernanke et al are merely monetising federal debt, which is bad economics, bad politics and, let's be real about it, has done nothing to help the real economy. This is probably why some are dissenting. Be that as it may, we can't rule it out at some point obviously, given strong support for it by some within the Fed. For Bernanke's Jackson Hole speech then and given the press, I don't think we can expect QE3, thankfully. Most likely Bernanke will just reiterate that the Fed will do what is necessary to aid the economy. It's disappointing to some obviously and perhaps this also weighed on markets.

Price action elsewhere was mixed. Treasury yields fell a bit over 3bps (10b range) on the 5-year and 10-year note (at 0.99 per cent and 2.23 per cent respectively). The 2-year yield was 1bp lower at 0.21 per cent. Aussie futures then ended 2-3 ticks lower on a 13-10 tick range. The 3s are at 96.16 and the 10s sit at 95.56.

For commodities then, gold was up about $35 from 1630 to $1774, silver rose almost 5 per cent, while copper was also up (2 per cent). Crude was mixed with WTI down 0.2 per cent ($84.99) and Brent up 0.2 per cent ($110.4). Nothing much for forex. The Australian dollar is little changed at 1.0431, the euro was off 30 pips or so to 1.4379, while sterling fell 84 pips to 1.6288.

With that out of the way we turn to the day ahead and the RBA governor's appearance before the House of Reps economic committee (0930 AEST). I'm not sure that we are going to learn too much more from the opening speech. The minutes, the deputy governor's Speech and the Statement on Monetary Policy released earlier in the month make it all pretty clear. We are literally in wait and see mode. About the only thing I think we can say is that if the RBA does end up easing – and I'm certainly not of that view – then I doubt very seriously that it is going to be a near-term event. With markets pricing in a 43 per cent chance of a cut at the September meeting and a 77 per cent chance at the October meeting, there could be some scope to sell those IB contracts. My reasoning is that the RBA, while they haven't hiked again, would be loath to actually cut given the economic backdrop. Sentiment is poor but that's it at the moment. For mine that means that if they are indeed inclined to cut, and I don't think they are, that they'll at least wait for the third quarter CPI in October.

Other than that we get US GDP revision tonight (for the second quarter) alongside the final August estimate of Michigan consumer confidence.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.