The European session is set for a slightly weaker start following similar sessions in the U.S. and Asia overnight as investors struggle to shrug off global growth and Federal Reserve uncertainty.
The Fed in being so open and transparent has left markets more confused than ever about when it will raise interest rates. This transparency only works when the Fed at least has an idea about when it is going to raise interest rates and why. The reason the markets are so uncertain right now is because that is the message we’re getting from the Fed.
It’s as though a straitjacket has been applied to the markets. We’re seeing the occasional struggle but ultimately the energy that was helping sustain markets at the elevated levels earlier this year is being drained. With so many markets in correction territory now I’m sure we’ll soon break free from this and I think that would have happened last week had the Fed hiked rates. In the meantime though, we may see it persist a little longer which means more downside may yet be to come.
This week has been particularly difficult for investors as the sour mood has been combined with a lack of news flow and economic data which can often provide a distraction or even more clarity. This morning’s German Ifo business climate survey and this afternoons U.S. durable goods data could provide that today as both of these are widely followed and are well respected releases.
Surveys can get a mixed response in the markets as they can quite often be unreliable but the German Ifo survey is generally regarded as being a good indicator of future activity due to its sample size and tendency to be fairly reliable. The survey has shown activity being fairly resilient to all of the external issues so far this year and the numbers have actually gradually improved. This month though we’re expecting a decline to 107.8 which suggests falling demand in emerging markets, particularly China, is acting as a drag on output and is expected to continue to do so.
U.S. core durable goods orders is one of the most widely followed economic releases as it gives great insight into how businesses are investing. This reflects both the current environment and, due to the long-term nature of the goods being purchased, economic expectations. While these numbers can be quite volatile, we’ve seen a steady stream of positive figures over the last four months and we’re expecting another small increase this month. Also from the U.S. we’ll get weekly jobless claims, new home sales and late this evening a speech from Janet Yellen, Fed Chair.
Investors will be desperate for more insight into exactly how the Fed intends to return the central bank to normalized monetary policy including when we can expect that first rate hike and just how much emerging market volatility will impact the decision. As always, volatility can quite often spike when Yellen speaks especially at times of such uncertainty and confusion.