Tapering fears hamper equities

Equity markets have reacted favourably and put a greater degree of emphasis on positive economic data recently, so one could have expected to see a more bullish surge based on the optimistic sets of data from both sides of the Atlantic today.

Certain Fed members seem determined to bring about the usual QE tapering anxieties among investors, and the notion that we could see a decrease in Fed bond-buying this Autumn is serving to push global indices lower.

European markets

The FTSE 100 made a great but futile effort to stay above the 6600 level despite the much softer mining sector today. Fresnillo dropped back by 9.5% after posting a 29% drop in its first-half core earnings. The significant fall in precious metals has been blamed, yet to some extent the market would have been expecting this. The company outlook and the dividend cut to 4.9 cents per share were the real reasons the stock has been punished today. The rest of the mining sector fell in concert, with Vedanta paring 5.4% and Randgold Resources also out of favour, dropping back by 5.3%.

We had several signals that the British economy is picking up the economic pace. These came in the form of higher house prices, rising by 4.6% in July, and British retailers seeing their best July since 2006. It would seem that the uncertainty borne out of this broad-based recovery, ahead of tomorrow’s Bank of England inflation report and the much-maligned promise of forward guidance, is reducing appetite for risk. Better economic data has complicated the plans of Mr Carney, it would seem.

In Germany, factory orders came in better-than-expected at 3.8% and showed the biggest rise in eight months. While many have discounted the improvement, as it is heavily weighted to big-ticket items such as aeroplanes and ships, surely an increased demand for such goods is a sign of a growing economy.

US markets

The US trade deficit was an unexpected piece of good news for the world’s largest economy, falling to its lowest level since October 2009 on the back of rising exports and reduced crude oil imports.

As many FOMC members opine the need to reduce bond purchasing, markets will focus more on uber-dove Charles Evans during his speech later today. His words may give more informed clues as to what will happen in the autumn.

The Dow is currently trading below the 15,500 level, while the S&P500 has failed to hold the pivotal 1700 level.

Commodities

After last Friday’s surge owing to a disappointing payrolls number, gold has given up the gains. Threats of early tapering from the FOMC have given way to a stronger dollar, and the casualty is the precious metals sector. The drop below the $1300 level was not unexpected, particularly in light of the repeated failures to capitalise upon tests of the $1350 level, and one would expect to see some support at $1270.  A breach of this specific metric could elevate the bears' mood and give credence to a retest of this year’s lows of $1180.

FX

It’s safe to say that the markets were expecting the 25 basis point cut from the RBA in respect of the cash rate this morning. The Australian dollar recovered some of its losses against the G10 currencies, with the New Zealand dollar giving a great performance as traders took profits on the news. The US dollar clearly took the top spot, as the tapering fears pushed bond yields slightly higher and made the greenback a more attractive place to be. Sterling also saw some gains against the euro as the better economic data gave it a boost.

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