Il Primo Ministro greco Lucas Papademos riceve l'approvazione del governo su tagli al bilancio che corrispondono al 7% del Pil nei prossimi tre anni e su una ristrutturazione finalizzata a ridurre di €100 mld gli oltre €200 mld di debito detenuto dai creditori privati, atteso il voto del parlamento • Standard & Poor's declassa il merito creditizio di 34 banche italiane tra cui UniCredit a BBB+ da A, Intesa Sanpaolo a BBB+ da A e Banca Monte dei Paschi di Siena a BBB da BBB+, S&P anticipa "una redditività decisamente debole per le banche italiane nei prossimi anni" • La produzione industriale italiana aumenta a dicembre +1,4% da novembre +0,3%, oltre le stime degli economisti +0,5%, anche se i dati del quarto trimestre -2,1% suggeriscono che la terza economia della zona euro è entrata nella seconda recessione dal 2009 • I Btp decennali salgono per la quinta settimana consecutiva, il periodo di recupero più lungo in oltre cinque anni, la prossima settimana il Tesoro vende €4 mld di buoni al 6% con scadenza 2014 • L'euro cala dal massimo di due mesi contro il dollaro, il mercato azionario europeo cala dal massimo di sei settimane e l'azionario Usa registra la prima settimana di perdite del 2012 dopo che i ministri delle finanze europee non hanno concesso il pacchetto di aiuto necessario a prevenire il collasso economico della Grecia

martedì 11 settembre 2012

Market Comment - September 11

(Marco Bonelli) Does the secret perception of its inability to stimulate growth prevent the Fed from launching QE3?

With little data releases scheduled this week, all eyes will be on the two main events, the decision of the German Constitutional Court on the legitimacy of the ESM on September 12 and the decision from the FOMC meeting on September 13. While it's hard to imagine that the court decision will turn out negative (which would threaten the small steps of finding a solution to the crisis and undermine the fragile confidence even more), the answer of the outcome of the FOMC meeting is far less certain, although "consensus expectations" imply an almost 100% "certainty" among market participants that the Fed will move into action!

The highest bullish option bets on commodities since May 2011 and basic materials among the best performing sectors on Thursday and Friday also point to some degree of complacency in regard of an imminent implementation of further asset purchases by the Fed (the remaining complacency stems from the confidence of an economic turnaround in China). Finally, wild swings in the USD in reaction to every word from Ben Bernanke and the decisive break of the 1-year uptrend (81.02) and 200day MA (80.75) of the DXY Dollar Index on Friday following the disappointing labor report also reflect the expectation of more monetary policy easing.

§  Without openly admitting it, the members of the FOMC are probably (somewhat) aware that two massive QE operations and the current 'Operation Twist' only had limited effects to economic growth, so questions are valid how effective a third round of outright bond purchases will be and the Fed is probably aware of it.

§  Ben Bernanke himself pointed to some negative consequences of a substantial further expansion of the Fed's balance sheet and a prominent study by the Federal Reserve Bank of Dallas outlined undesirable long-term effects by an ultra-easy monetary policy that already relies mostly on unconventional tools to (supposedly) fulfill its mandate.

§  Although the Fed Chairman described the weakness in the labor market as "grave concern" and the economic recovery as "far from satisfactory", some economic data from July and August surprised to the upside (i.e. retail and housing data - supporting the Fed's underlying optimism of a gradual recovery in economic activity) and the (slightly) better than expected payroll data from July (unfortunately revised from 163k down to 141k) was followed by a better than expected ADP Employment Change number for August and slightly falling weekly jobless claims! Beside that the official (!!!) unemployment rate keeps falling! So, despite the disappointing 96k change in nonfarm payrolls for August, the Fed might not have enough weak data to justify another round of quantitative easing eight weeks ahead of the election (anything decided at the upcoming September 13 and October 24 FOMC meeting will have a strange political taste anyway!).

§  In this context and with apparently not too many "tools" left to attempt to steer the US and global economy, the Fed may keep its powder dry for times the financial system really needs more liquidity, like severe tightening of financial markets, intensifying of the European crisis or a further deterioration and acceleration of downward pressures of the US economy.

If in fact it turns out that the Fed disappoints in (not) announcing QE3, the liquidity argument that drove the market over large parts since the summer rally started beginning of June, will quickly implode as the ECB only buys assets under conditions and the Fed obviously refrains once again from injecting additional liquidity into the financial system. Although QE is the famous synonym for monetary easing, the Fed could still decide on other policy steps like a "Funding for Lending" program, a variety of the "Twist" operation or extending the commitment to leave interest rates at zero beyond the current "until at least 2015". The question is if anything like that will keep investors also excited; chances are that anything else but QE3 may be seen as a disappointment.

Considering the possibility of this negative development, is there anything that could "save" the market that stubbornly holds at or close to new multi-year highs? Liquidity from asset allocation shifts and the famous money on the side-line could get unleashed ahead of the September quadruple option expiration on September 21, ahead of the end of the month and the quarter and also the fiscal year-end for many mutual funds in the following month. Another important driver remains the election cycle in the few months heading into an election. The beginning and the end of September through the middle of October are historically favorable for the market. Having said that, in many ways the current economic and financial environment in its entirety has little precedent from past developments, so the election cycle might be the weakest argument unless upcoming polls clearly shift towards the possibility of a new president.

So the big question is how much of central bank action has really been priced into the market or is the hint of a double-top in the major indexes (yesterday, the Nasdaq Composite fell below its March/April high of 3134.17, the NDX fell below 2794 while most other averages reversed lower after almost reaching new highs intraday) a precursor for more to come, no matter what?

Trade well.

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

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