SCOREBOARD: QE correction

Continued talk of a Fed easing review, coupled with sombre US jobless claims and European data, saw a downturn in global markets.

Global equities pulled back further overnight, and the big hits were in Europe. There was probably a bit of catch-up there from the previous session, but the Dax finished 1.9 per cent lower, the CaC was 2.3 per cent lower, Italian stocks fell 3 per cent, while the FTSE100 fell 1.6 per cent.

Now, we know the root cause is the Fed and the threat of quantitative easing being pulled in, although the tension and pressure for a correction had been building for a while. In that environment, our good friends the European PMIs (which in reality aren’t great as indicators) become all-important, and last night they added to the sombre tone – the composite index fell to 47.3 from 48.6. And the earth shook.

There was a run of other data out of the United States that rocked sentiment as well, especially those jobless claims numbers. New claims rose to 362,000 from 342,000 in the week to February 16 and then the US Philly Fed index dropped to -12.5 from -5.8 and an expectation of 1.

Now, while all of this may have hit sentiment and added to the sell-off, the glaring irony is that data like this makes it less likely that QE will even be pulled in. I mean, regardless of the data there is no chance QE will end, although purchases might be reduced slightly. But that’s script. Markets rally, data looks good, the Fed starts talking about a halt to QE, and markets correct.

Enter our hero. Bernanke steps in, dressed in shining white robes and then, with one smooth fluid motion, reaches over to the keyboard to press enter. Another one trillion dollars created, jus' like that (think Eddie Murphy in Golden child – "Jus' like that"). The correction could last some time though – we’ve got the sequester and with a week to go, little progress has been made apparently, so it looks like we will go over this cliff. I won’t be at all surprised if we do.

So with all that going on, imagine what would happen in the entirely unlikely event of electoral uncertainty in Italy? Oh wait, that’s entirely likely ‘cause it happens all the time. Anyway, point is there is plenty to keep this correction going and I'm sure sweet brother Numsie (the Bernank) will take his sweet time before informing the market that QE will, at best, only be reduced by a few billion here or there.

Anyway, with about an hour left to trade, the S&P500 is off 0.6 per cent (1502), the Dow is 66 points lower (13,861) and the Nasdaq is 1.2 per cent lower (3125). Following yesterday’s rout, commodities were mixed with crude up 0.4 per cent ($94.85), gold off a couple of bucks ($1575) and copper down 1.5 per cent.

Price action elsewhere wasn’t that exciting, although we saw some decent moves on the euro and the British pound. The euro is off 66 pips to 1.3180 and the pound is 90 pips higher at 1.5240, although the Australian dollar is little changed at 1.0238 and the yen is at 93.11.

Then in the rates space, US treasuries pushed higher and yields fell only a couple of basis points on the 10-year to 1.98 per cent. The 5-year was 1 basis point lower at 0.84 per cent and the 2-year is at 0.26 per cent.

Other news and data wasn’t all that bad: US housing foreclosures dropped sharply from 4.04 per cent to 3.74 per cent while delinquencies fell a decent amount as well to 7.09 per cent from 7.4 per cent. Then existing home sales rose 0.4 per cent in January after a 1.2 per cent fall.

Of less relevance to policy, the US consumer price index accelerated in January, with core inflation rising 0.3 per cent to be 1.9 per cent year-on-year. Headline inflation is lower at 1.6 per cent year-on-year.

Over in Europe, it turns out out that the eurozone crisis has been quite profitable for the European Central Bank so far. Their accounts show that they earned €555 million on Greek bond holdings last year, which are about €30 billion. They also reported that they hold €99 billion of Italy’s bonds; €44 billion of Spain’s; €22 billion of Portugal’s; and €14 billion worth of Irish paper.

For today, the SPI suggests the All Ord’s will fall a modest 0.2 per cent, but then we had our big day yesterday. In terms of data, we see Chinese property prices around lunch-time, then tonight we see the final estimate of German GDP and the well-respected IFO survey. For the US, there are just a few Fed speakers – Tarullo, Rosengren and Powell.

Have a great weekend…

Adam Carr is a leading market economist.

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