Last week wasn’t a great week for equities it seems. Indeed we saw the biggest drop in US stocks for the year! And that’s in a week where we really didn’t see any major news flow, or view changing information. Plenty of punters now talking of a correction, as is often the case when the price action starts to turn, but who knows? It’s the summer holidays in the north now anyway, and trading volumes are lighter. The good news is the fall was only 2 per cent for the week following a 1 per cent fall the week prior - so it’s nothing major and quite orderly.
I guess the other thing to consider is that the market action is notionally based on a QE tapering which of course makes absolutely no sense. If they taper it’s because the fanatics on the Fed are seeing some good news, and when it comes to good news these people are normally blind - resisting the recovery narrative at every point. Moreover, they’ll still be printing. True enough that bond yields are rising I guess- the US 10 year Treasury yield was up another 5 bps on Friday night and sits at 2.82 per cent - and this is spooking people.
Falls on Friday were only modest though- 0.1 – 0.3 per cent, and in Europe we actually saw modest gains for the session – led by miners. Commodities it seems are getting a sold boost, especially precious metals and silver shot up a further 1.7 per cent, while gold was up $10. For the week, silver is up nearly 13 per cent, while gold is $58 higher. Copper and crude are also higher and rose in every session last week but here the gains are more modest - copper is up only 1.8 per cent for the week, and crude is 1.9 per cent higher.
I can’t really say that the action this week is going to be more exciting. Volumes will likely remain thin and the fact is the dataflow is much lighter than last week. For the US there is zip early on and it’s only toward week’s end that we see anything useful with US existing home sales and FOMC minutes on Thursday night. Naturally everyone will be looking for any signs out of the minutes about when exactly we can expect a taper.
Many are convinced on September – a done deal to some – but unless they’ve got the heads up in private client meetings with the Fed officials, I can’t see where that comes from. The Fed have been vague about the timing, most fed officials stating it could happen at any meeting, but that at this point they were not convinced the economy was ready. I haven’t actually seen many voters come out and say - ‘yep, we should do it now’. So my guess for the minutes is that they will continue this vague line of reasoning - “we might, but we might not, although we will at some point - maybe - if the data comes out as we expect. Then on the other hand…”
The Jackson Hole conference (central bank conference) also kicks off on Friday and much has been made of the fact that Ben Bernanke, along with many other Fed officials and heads of the European Central Bank and Bank of England aren’t going this year. This conference has, in the past, been used as a QE launching pad - ‘to infinity and beyond!’ but Bernanke’s no show has tongues wagging - since 1987 he’s missed it once. The topic of the conference is global dimensions of unconventional monetary policy.
Otherwise for Australia there is little of interest. We get car sales today and the RBA’s minutes tomorrow. The talk of the town is that the RBA may be close to the trough - we can only hope and pray this is true. I think the RBA has done enough damage to confidence and of course rates are so low they risk distortions in the economy and many are warning of another house price bubble. However, as we saw with Rudd’s recent announcement to provide much, much more welfare to foreign car makers - rent seeking is alive and well here. Consequently, we can’t rule out further rate cuts - the Australian dollar is the target here.
Have a great week…
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.