Monthly Archives: August 2012

Week Ahead 27 August 2012

It was an interesting week on the market, with the MSCI Russia Index rising 1%, but all other key indexes slipping into negative territory – in some cases for the first time in many weeks. With declines of just 1.5% in Europe and 0.5% in the US, we remain far short of a significant correction though. For it’s part, gold rose strongly, in line with our Investment Idea from last week. What can we expect this week?

In sharp contrast to the preceding week, the closing days of August bring a heavy flow of important economic data. Volatility can be expected to rise as this data flows through, although it will take some sharp surprises to cause a significant market break either up or down. Trading through the week will represent efforts to predict the outcome of FOMC Chairman Ben Bernanke’s key-note speech at the Jackson Hole central banking conference on Friday. The market widely expects clear guidance about the most likely form, and possible timing of further stimulus efforts in the US.

US growth is currently strong enough to dampen the chances of immediate outright monetary expansion (further QE). But, the US economy faces severe enough political and economic challenges further ahead. As such, the FOMC has guided investors to expect news this week. Given that we still haven’t seen anything that could be honestly regarded as a correction, the near-term market direction remains uncertain. Sharp declines absent fundamental moves remain unlikely and would represent a tactical buying opportunity ahead of central bank guidance (in addition to Jackson Hole, the ECB will meet next week). Whilst the global risks remain high, summer-going traders missed this rally, and the central banking phase continues to dominate other risks.

Best regards,


After the Central Banks…

It has been a big week on the markets, dominated by two key policy meetings, at the ECB and the FOMC in the US. The simplistic analysis of the outcome of these meetings – looking at market reactions – is that the central banks have disappointed investors, who were expecting dramatic and immediate stimulus. I would argue that such an outcome was never likely, and that the central banks have acted very positively, setting the stage for a much more stable August than we experienced last year.

Few sincerely expected the FOMC to act on new quantitative easing, but some were disappointed that it didn’t change its statement to keep rates lower into 2015. Instead, the US rate-setters sent a clear signal that they plan to take more determined action in September, if the economy fails to improve until then. Most likely, FOMC Chairman Ben Bernanke will lay out his plans in more detail at Jackson Hole on 31 August.

The stakes were higher with the ECB, after Mario Draghi’s aggressive speech in London last week. In reflection, though, it is odd that investors were disappointed. The ECB was never likely to immediately and unconditionally intervene in bond markets; and market prices, although strengthened since London, were far from showing confidence that such a step would happen.

Few believed that immediate ECB action was really plausible, and with this in mind the announcement made – of a conditional plan being developed to provide massive support – was as much as we could hope for. There are some awkward nuances: Draghi believes markets are unfairly punishing European governments, but those same governments need to request a bailout to get his help, and Draghi is clearly seeking to bridge a period of planning and preparation with strong words. But, the key fact can’t be ignored: The ECB has put aggressive action on the table. This is a key development that we have been looking for a long time. Europe has been lacking a lender of last resort, the ECB is now preparing to fill that role.

The view is relatively positive then. Not to say that we see a sharp, long, structural bull market ahead. But, I am not especially surprised to see some disappointment in the markets, which tend toward excessive short-termism. There is still much to work through. But, I would argue that risky assets have found their bottom for the near term and should soon begin to work their way higher over the coming weeks.

Best regards,


"Golden" Cross?

The authorities are working hard to prevent the market from repeating last summer. IF (big if) the ECB and FOMC don’t disappoint, we are well positioned to break the technical cycle.
This chart also reminds us how cheap equities are…