SCOREBOARD: Taper tantrum

Markets saw big falls on each side of the Atlantic as investors were disgruntled by continued taper talk.

Markets sank again last night with big falls in both Europe and the US. We’re talking 1.2-1.7 per cent on the major European indices while on Wall St the S&P500 ended 1.2 per cent lower (1573), the Dow was off 139 points (14659) and the Nasdaq fell 1.1 per cent (3320).

Obviously we’re still seeing the repercussions of the Fed’s QE tapering talk - or the ongoing ‘market tantrum’ as some would suggest, and I think describing it as a tantrum is the right way to think.  A QE tapering is obviously not a bad thing, more to the point, the reasons behind it are very positive - yet look at the carnage! Copper was down another 1.987 per cent, gold about $10 to $1281. The only upside was found on crude - up 1.3 per cent to $94.88, apparently on concerns over supply disruptions in Canada (floods I think).

The thing is and I mentioned would be the case yesterday, the Fed is trying to moderate all the talk of a QE tapering. We had two Fed speakers and both highlighted that super stimulatory policy would be around for some time. Minneapolis Fed President, Kocherlakota, said that the Fed must highlight this to markets every single time and “hammer it home” Even the Dallas Fed President, Fisher, who is in favour of scaling back QE, was at pains to highlight that “what we’re talking about here is a dialling back… the word exit is not appropriate here.”

Now the Dallas Fed President went on to say that policy makers were on top of things and had anticipated the market’s reaction. He likened markets to ‘feral hogs’ who when they detect a bad smell go after it - ‘markets test things’.  But it’s one thing to be aware of what is going to happen, and another entirely for policy makers to be able to control it. Regular readers will know that I’ve long argued that central banks will not be able to control the exit from super loose monetary policy and they should never have done it - at the very least not for the length of time they have.

The Fed doesn’t have a great track record and we can’t forget that the GFC was largely due to their actions - super loose monetary policy and lazy market supervision.  And they’re doing it all over again. In any case US treasuries pushed higher on the back of those two Fed speakers  - the 10-year yield down to 2.54 per cent from 2.6 per cent and there are more Fed speakers this week.

Anyway, in terms of the other price action we saw the Australian dollar up almost a big figure to 0.9254, euro was up 15pips or so to 1.3123 and Yen is at 97.76 from 98.4. Not too much and it was the same in the US Treasury space as well. They pushed a little higher following the strong rally of late - the 10-year yield down to 2.54 per cent from 2.6 per cent.

Bits and pieces otherwise.  For the data, we saw Germany’s business climate index actually improved in June, rising to 105.9 from 105.7 on the back of a pick-up in expectations. Otherwise there was some minor US data and while it was lower tier it does back the case the US economy is picking up some, from already decent growth rates. So the Chicago Fed national activity index rose to -0.3 from -0.5 while the Dallas Fed manufacturing index shot up 6.5 from -10.5 .

In the domestic space, the Opposition Treasurer Joe Hockey said that there would be wouldn’t be an economic downturn under a coalition government and that “It will be my number one imperative to safeguard the economy against a significant downturn and to turbo charge economic growth and jobs." He was a bit too polite on all the talk of recession though and coming after Treasurer Swan and Prime Minister Gillard’s rebuke to those who talk about recession all the time, Hockey said: “It is the height of hubris to dismiss out of hand dire warnings of a possible downturn from respected observers. It is wise to listen and prepare".

On that point I would disagree. Most readers would already know that it’s not the cloth or the baubles that a person wears that makes them wise. It’s reason and logic – good judgement. These are what makes someone wise. Is it really wisdom to proclaim or talk about a recession every year? Would it be wise to take that seriously? No of course not - that’s just hysteria. So with that in mind I think it is entirely appropriate to dismiss out of hand all the talk of recession, because the analysis behind it is weak – flawed even, as Hockey himself notes.

For our market today then, the SPI suggests a further fall of around 0.7 per cent. Not much in the way of data in our session, while tonight, the US releases durable goods orders, house prices, consumer confidence and new home sales.

Have a good day…

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