Markets will be glad for the upcoming weekend break. If only to take the time out to try and get their heads around the Fed’s reasoning in not tapering asset purchases on Wednesday, and to lick their wounds after some fairly heavy losses. This new pause and reflection should lend itself to a quiet day with equities expected to slip from the highs with the dollar able to regain some poise.
The quandary that traders and investors will find themselves with is one of doubt. Should risky assets move higher as tapering is put to bed for now or should we position ourselves for the inevitable improvement in US data and the subsequent tightening of monetary policy by the Fed? This dilemma is the essence of investing. In the mean time I expect that money will sit on the side-lines at least today. The run higher in emerging market assets will likely be the warning sign. Should we see outflows increase then that will be a cue for taking cover.
Part of our commentary around the Fed was about the very real risks and relationship between the Fed’s policy and that of the Bank of England. One analyst stated, very rightly, that the Fed is not in the business of pandering to market expectations. They saw that rates had got to inappropriate levels for the relative strength of the US economy and decided to not tighten monetary policy. The markets are playing the same song with regards to UK rate expectations and the chances of Mark Carney ‘pulling a Bernanke’ and ‘hesi-tapering’ will increase.
Carney would have been helped by yesterday’s retail sales number, which disappointed estimates. Consumers in the UK have been the lifeblood of the recovery here in the UK as it has only been in recent weeks that the economic good news has become "broad-based"with meaningful contributions from the manufacturing and construction sectors. Sales were boosted in the summer as a result of the amazing weather but, as all those who run a house will know, money doesn’t grow on trees. The summer demand will have dragged forward from future months and consumers will likely tighten purse strings through the rest of the year after enjoying the sunshine.
Factor in as well that the divergence between prices and wages remains high, despite the recent slip in inflation, and you’d think that late Q3/Q4 could be a tough one for the High St. A question we must also ask is whether the recent increase in market interest rates is already starting to hurt growth as it has in the US in the past couple of months.
The German election is the main thing for Europe at the moment. It has been called the most boring election in years by pundits and commentators, given the likelihood that Angela Merkel or "Mutti" will win out once again. Today’s market video features me in a silly hat talking about the elections. We will be outlining our thoughts on this and the risks to the euro that the election could throw up in our German Election Special Webinar this afternoon at 14.00 BST.
