Monthly Archives: September 2012

Market Comment 14 October 2012

Dear Client

In line with market expectations, the US Fed announced a new round of quantitative easing last night, and markets have reacted positively.

Specifically, the FOMC decided to increase its balance sheet by buying $40 bln of mortgage-backed securities per month. The longevity of this new program is undetermined, but the FOMC will review its impact after two months. The expected date for first interest rate hikes was also moved out into 2015.

Whilst many are sceptical that such programmes can really help, there are some reasons to expect positive affects – at least in the short- to medium-term. First, the housing market is already beginning to recover, and additional support to the whole sector can only underscore that trend. The Fed believes that the US economy can return to pre-crisis growth rates, and that the housing market is a key component, which is currently lagging. The QE programme might have only a limited direct impact, but it ought to help at the margin.

Perhaps more importantly, the Fed is trying to shift the confidence balance. Whilst we can argue if QE has solved the ills of the crisis, few would disagree that its activation in 2009 was a key component restoring confidence in the economy and thus averting a worse outcome. If the current programme feeds optimism sufficiently, it too will fuel growth.


By contrast, yesterday’s rate hike by the CBR was less well predicted and is unlikely to have a significant impact on Russian real market conditions. Depending on developments, another small hike can’t be ruled out, as the CBR is focussed on building a reputation for fighting inflation. However, I would argue that these rate moves are cosmetic rather than fundamental, as inflation issues are more structural rather than monetary in their nature.

There remain concerns going forward, not least – the incoming US government will face a significant difficulty planning the 2013 budget. And Europe, although moving forward impressively, won’t suddenly return to growth. But risky assets currently have a clear tailwind. We have pre-selected conviction and high dividend ideas to meet your needs, and we remain at your disposal to help with investment decisions.

Best regards,


Market Comment 4 September 2012

Markets performed broadly in line with expectations over the past week, marking their recent gains ahead of the key speech delivered on Friday by Ben Bernanke of the FOMC. That speech essentially met expectations, significantly increasing the probability of further monetary expansion from the central bank. Commodities responded, with gold and oil rising on the week.

The outstanding issue is timing. As much as Bernanke stimulated confidence in further easing, he didn’t guide on when to expect it. With the US elections looming, the timing issue remains complex.

This week we move onto the next act in the central banking chapter, with the ECB meeting on Thursday to decide on rates. There is a chance of a rate cut, which could reverse some of the euro’s recent gains. But, the main focus will be on what Mario Draghi has to say about plans to intervene with scale in peripheral bond markets. Such an outcome, whilst expected, would likely encourage markets to rally further.

Behind the scenes, of course, all is not rosy. Markets slipped ahead of Bernanke’s speech, on uncertainty as to its outcome and amid economic weakness, especially in Europe. Russia too edged back on global risk aversion, despite the resilience of oil prices, although such a divergence is unlikely to sustain. Russian growth rates have lightened in the summer, but remain healthy on a global comparison.

In the developed world, central bank manoeuvres can bring ease to financial markets, so we are looking for tactical gains. But, the longer-term economic problems will continue to heal slowly at best.