Market Comment - August 2

(Marco Bonelli) For how long will the markets be happy watching central banks only talking the talk and not walking it?

The Fed made little changes in the statement following the FOMC Meeting, acknowledged that economic activity "decelerated somewhat" but that monetary policy remains unchanged, leaving investors with the promise that the Committee will "closely monitor" further incoming information.


The ECB again displayed strong language that risk premiums "need to be addressed" and that high yields are "unacceptable" (...ever thought about why yields are high..., oh sorry, I forgot, these reckless speculators who drive rates higher, really need to be stopped...), suggested that they "may undertake outright open market operations" but added that the ECB will "design modalities" for such policy measures over coming weeks (...in other words, due to various resistances, their hands were tied and they couldn't do anything now...) and at the same time tried to toss the ball to the fiscal side (...governments must stand ready to activate EFSF, ...must restore sound fiscal positions..." or even better, "...further reforms needed...").

Of course nobody expected anything from the Fed (I repeat, NOBODY expected anything, right...?) and it's obvious that the Fed is "moving closer" to doing something. Consequently, media outlets pushed the great news with all force by saying that "Fed signals further steps to boost economy after first half growth slowed" (Bloomberg) or "Wary Fed is poised to act" (WSJ) and the market was happy. It's hard to argue that nobody expected anything from the ECB and it remains to be seen if the markets are happy waiting until September 6 (next ECB Meeting) and September 13 (next FOMC Meeting) having nothing else than promises.

What could be more interesting are small pieces of positive news from the consumer front: after better than expected Consumer Confidence data for July (only driven by a more optimistic outlook) and slightly less than expected weekly jobless claims (how much seasonal distractions from the automobile sector are still in the number?), strong retails same-store sales for July were reported across the board. This is a nice distraction after months of disappointing data but it's way too early to define it as a simple counter move in a downtrend or as the start of a turn-around. Tomorrow's labor report might deliver a preliminary verdict to that interpretation.

Still the headlines from central banks will dominate today's discussions as the day might turn out to be a day for picking up the pieces (all speculative positions in stocks, bonds, the Euro etc.) and digesting the news of non-action by central bankers while waiting for the "mother-of-all-economic-data" - the BLS report with non-farm payrolls from July. The events or non-events from the last two days in combination with the payroll data tomorrow clearly has the potential to push the market outside the +/- 5% comfort range.

Trade well.


(Marco Bonelli is the Managing Director of International for CL King & Associates in New York. The opinions expressed are his own.)