Lack Of Clarity Denting Investor Hopes

Clarity is at a near-term low this morning, and I’m not talking about the fog that has prevented me from seeing the other side of the Thames from our offices. Uncertainty around monetary policy efforts in the United States and, to a certain extent, the final government make-up in Germany after this weekend’s election have pressured investors into being slightly sanguine as we open this week up.

Following St Louis Fed President Bullard’s chatter on Friday that a tapering of asset purchases in the US could take place in October, we had speeches yesterday from three other members of the FOMC. The Presidents of the Federal Reserves of Atlanta, New York and Dallas all spoke yesterday with the latter the most vocal at the decision to hold off on stimulus reduction. Richard Fisher remarked that he had disagreed with the Fed’s decision and that “Doing nothing at this meeting would increase uncertainty about the future conduct of policy and call the credibility of our communications into question”.

Focus will not shift from Washington in the coming days and weeks however. Having emphasised that growth in the past has not been up to scratch the Fed looked forward to what could possibly damage the US economy going forward. It can be summarised with one word: Congress.

This year will see yet another battle in Congress over the debt ceiling, much like the one of August 2011. We also, by some quirk of spending and scheduling, are due to have a budget debate as well with a decision needed by midnight next Monday to prevent a shutdown of the US government. Without a budget or a continuing resolution the US government will be effectively closed for business.

Messing with the full faith and credit of the United States is one thing that could change the circumstances of this recent dollar movement; investors somewhat tautologically use the USD as a haven from US issues. This is not an endorsement of these tactics of course, but will certainly please USD sellers who have seen the greenback slip by 3% in the past 3 weeks.

In Germany, coalition building is likely to remain unresolved until Friday after it became clear that SDP leader Peer Steinbruck would be replaced. Much like the focus of the election was not Germany itself but Germany’s position in Europe, the focus now that Merkel has been returned is once again the periphery. Fresh strikes have been announced in Greece to coincide with the return of the Troika that are in town to look over the books.

Following the strong Chinese data on Sunday night, yesterday’s readings from Germany and Europe were both above 50.0 whilst, although manufacturing contracted in France, the overall reading saw growth for the first time since February 2012. Today’s IFO business climate number from Germany is expected to rise to 108.0, the highest since April last year.

US consumer confidence is also due this afternoon with the measure expected to stay close to 4 year highs.