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However, the fact the S&P 500 fell 0.4% yesterday, while Asian and European markets are showing zero panic highlights the huge change in investor psyche. Is it complacency or is it that the market has done its homework and genuinely thinks that the foreseeable risks will sort themselves out with limited impact on future earnings streams?
Interestingly, the US volatility index (VIX) pushed up a mere 7.1% to 14.99% yesterday (still in-line with the year’s average), despite emerging markets continuing to find solid redemptions; the US being likely to run out of money by mid-October; a mass FOMC rotation exercise taking place in Q1 2014 (which will surely create uncertainty); political issues in Italy and potentially Germany; Greece needing a third bailout and now geo-political tension flaring up. The fact the S&P 500 only fell to low of 1639 recently (a pullback of 4.1%) and the ASX 200 to 5028 (a pullback of 2.7%), testament to the positive flows and hardly thematic of markets looking ready to collapse anytime soon; in fact, the ASX 200 has actually been in positive territory for most of the day.
Reports (from CNBC) that the Obama camp is gearing up to appoint Larry Summers as the new Fed chairman won’t surprise too many, given it is a two-horse race and the President understands and trust Mr Summer’s impeccably. However, the timing could surprise a few people if we are categorically told in a few weeks of Mr Summers appointment, given this in theory could come at the same time that the Fed potentially announces a major policy change.
Still, getting all the major news out into the market at one time could actually be a really positive move in terms of lowering volatility. There is also talk that Janet Yellen could step down if she is overlooked and this could have big ramifications, not just for the hawkish/dovish bias of the future compositions of the Fed, but also means that with Sara Raskin and Sandra Pianalto retiring in Q1 2014 there effectively won’t be any female voting members on the board (Kansas City president George is a non-voter in 2014).
Geo-political issues are front and centre, although Asian traders haven’t really bid up Brent, WTI or gold today. In fact, US treasuries have re-claimed the 2.80% level (up two basis points on the day) and we have to look in the forex market where the flows have been largely aimed at buying JPY and CHF. AUD/JPY has been the big mover in the G10 space, which makes sense given the recent moves by Japanese institutions to look at Aussie bonds again. Syria is not big a player in the oil market these days, with H1 2013 production around 35,000 barrels a day, down from 350,000 in March 2011, so you can understand why we are not seeing big price spikes, but gradual appreciation in the energy complex over the last couple of months.
All eyes now fall on commentary from Iran, Saudi Arabia and Iraq, who of course are key players and are gradually getting pushed into fray. Iraq, we suspect, is the market’s key concern as it is OPEC’s second largest producer, and domestically internal tensions are becoming more vivid by the day. Reports that the US is ready to take action in the near term (CNN) are of interest and the fact that President Obama has had detailed liaisons with Australian Prime Minster Kevin Rudd suggests the US is drumming up support from its allies.
Looking at the equities space, the Nikkei bounced nicely off its session low of 13,529 as USD/JPY started moving higher. The second (of seven) expert panels are taking place today, discussing the sales tax and a decision on whether the economy is strong enough to withstand this proposed tightening will be made after this series. All signs point to the tax going ahead, with Economy Minister, Akira Amari, saying 70% of panel experts support raising the tax. For us, implementing the tax should weaken the JPY further as not only will it give the market more confidence in the government, but should give the BoJ even more ammunition to ease further, something Haruhiko Kuroda has said he is prepared to do recently. Still, until we see the sales tax fully implemented, it is unlikely the JPY will continue its weakening path and the Nikkei its longer-term uptrend.
Elsewhere the ASX 200 is flat, China and the Hang Seng are 0.5% and 0.3% lower respectively, so none of these markets are likely to inspire too much in the way of positivity for European markets. We have seen mostly buying from clients today in our out-of-hours markets, testament to the uptick in Japanese markets, while some are pre-positioning in hope of a strong German IFO business survey. Liquidity comes back into markets today with the UK back online, although thin volumes in the US will likely be seen.
On the data side (as mentioned) the German IFO report is expected to improve across all three surveys, while in the US we get the Case-Shiller house price index, Richmond Fed manufacturing read and consumer confidence. A handful of investment banks revised down their Q3 GDP run rate on the back of yesterday’s poor durable good, but we don’t see today’s reports as a major event risk. Tomorrow’s pending home sales could be interesting given the weak new home sales, especially as the market expects a 7.9% yoy increase here.