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The debate on US monetary policy seems to be shifting by the day, from around when will the Fed start to taper, with expectations pushed back from December to March and even calls as far out as June, to whether the Fed will now actually look to increase the pace of its monthly buying (QEinfinity).
Traders and strategists alike are eyeing when the FOMC doves are due to speak, because there is heightened speculation that if we are going to get the first clues of an increased QE purchase rate, it will come from the likes of James Bullard or Charles Evans. Still let’s say the Fed does cut in March, it would have expanded its balance sheet by a similar amount of the whole QE2 programme!
Let’s say it does increase the programme by $10 to $15 billion a month, will it create jobs? Will we actually see the trend in core PCE change? Probably not, and imagine the negative rhetoric from the likes of Esther George of Richard Fisher (the uber-hawks on the FOMC) around the costs and consequence of the bond-buying programme. The market won’t know which way to turn. Of course it makes the Fed’s job of trying to unwind its position in the future (providing it ever stops QE) that much more difficult and skilful to achieve, and that much more likely to end in tears. In Janet Yellen we must trust.
It’s not just stimulus though that is pushing up equities; US earnings are actually what the bulls will be pointing too. This quarter we have seen one of the best aggregate EPS beats in years, while sales growth is being seen in the oil, gas, materials and very modestly (+0.6%) in the industrials space. For once this is not a financials story and it is refreshing to see earnings actually show promise.
Talk on the floors has once again been around how much further EUR/USD and GBP/USD can push. We’ve seen better two-way business on EUR/USD, and while the trend is undoubtedly higher, many are pointing to the extreme positioning in the market. It is interesting to point out that EUR/USD has diverged from traditional fundamentals (i.e. bond yield spreads) and is running firmly on the idea that European banks are going to be using the coming months to assess their balance sheets and potentially sell distressed assets in time for the European asset quality review (AQR) in October 2014. Of course some of these assets will be outside the EMU, which in turn means capital inflows, which in theory is the basis of forex markets. Until these capital flows abate, the time to see a snap back is not likely just yet.
The S&P 500 may be testing its channel high and equality target, while European market also look strong, but Asia is being dictated too by China and moves in both the money markets and equities. As things stand, a multitude of markets are falling away, with the seven-day repo rate nineteen basis points higher at 4.97%. The money markets could feasibly continue to move higher in the short term, but I‘ve full faith the PBOC will have an upper limit in mind where it will provide the necessary liquidity to the interbank markets, however for now the markets seem more sanguine ahead of the weekend.
One of the other talking points is around Abenomics, with Japanese inflation failing to increase again. CPI ex-food continued on its annual pace of 0.7%; however the positive if you look at inflation ex-food and ex-energy, the Japanese economy has finally ended the run of deflationary forces after seeing falling prices since December 2008. Still, there are many who feel we are at a really critical juncture in ‘Abenomics’; while most still feel the BoJ will win this battle, there are of course the cynics who feel this could really end badly.
The ASX 200 is closing out the week on a slightly firmer footing, although as the Chinese market falls away into the afternoon, the bulls may start pulling away. It still feels like this market wants to squeeze higher and once again traders will be eyeing a close above 5400 and more notably 5426. It’s hard to see where the real value is in this market now, but there is still chance of multiple expansion in the coming weeks and into Christmas. AUD/USD on the other hand seems a little lost and hasn’t seen the same sort of flows as EUR/USD. Long positions in EUR/AUD look quite attractive after the recent key day reversal.
So, with mixed trade in Asia and limited moves in US futures, European markets should see limited flows on the open. On the data side the market will be watching German IFO, UK advanced Q3 GDP, with consensus at 1.5% year-on-year (range 1.8% to 1.3%), which would also be the strongest growth reading in the UK since March 2011. US durable goods and University of Michigan sentiment will also be in play.
On the earning side we get numbers from BASF, Procter and Gamble, UPS and Simon Property Group. Of course the talking point on the floors will be the conservative valuation, with the company valued at 9.5x 2014 sales, some 27% below the current consensus forward projection for Facebook. This should have absolutely no problems getting away!