Today’s losses have been relatively contained, while in the US there has been a cautious move higher, but it feels as if investors are still adjusting to the prospect of military intervention in Syria. A surprise drop in US home sales may have also helped, in that it marginally reduces the likelihood of US Federal Reserve tapering in September. Nonetheless, with only two days of trading left in August it is entirely possible that we will see markets suffer further losses.
Bank of England governor Mark Carney had a second go today at clarifying forward guidance. You can’t help but feel sorry for him, since he feels he is perfectly justified in his view that rates will stay unchanged for an extended period. However, markets for once are of a more positive disposition, thinking that the general improvement in the UK economy and, more generally, the global one, will continue, forcing the MPC’s hand ahead of expectations.
In a rare outburst of common sense, German chancellor Angela Merkel observed that Greece should not have been allowed to join the euro in the first place. While true, this does little to relieve the situation as it is, with the embattled country likely to need additional funds in its long journey back to health.
Although still in the midst of their worst fall since June, US markets have edged higher today. An unexpected 1.3% drop in pending home sales in July has reminded investors that all is not well with the US economy, giving hope to some that the Fed might yet stay its hand in September. The guessing game goes on, with the added spice of a potential debt ceiling argument helping to enliven the situation.
Oil, in both its US and Brent Crude forms, is moving higher once again, driven by ongoing expectations that western nations are about to intervene in the Syrian conflict. Syria itself may have little oil, but its proximity to Iraq, the second-largest producer, means that traders are acutely concerned about any spillover of the fighting into neighbouring states. The Fed would be wise to bear this in mind when thinking about tapering, given that higher oil prices naturally cramp economic growth in the US.
If this was Mark Carney’s idea of refining his forward-guidance approach, then he clearly needs more practice. Sterling and gilts both moved up after his speech was published, showing that the policymakers of Threadneedle Street have a wildly differing view of the prospects for the UK from that of City types. Even a reference to yet more stimulus did little, so I think Mr Carney will need to keep tinkering with his message for the time being.