Central Bank Policies See S+P 500 Spread Betting Index Outperform
Financial spread betting markets throughout this year have had the behavioural characteristics of a small child. Well behaved when enveloped in the comfort blanket of easy money, but prone to spitting the dummy out when confronted with the prospect of having that blanket removed.
By and large, central banks around the world have indulged this obsession so much so that asset prices bear no relation to the fundamentals of the global economy, and events in Europe in particular.
This year we’ve seen of two LTRO’s from the ECB as well as a rate cut, further asset purchases from the BoE and stimulus from the BoJ, while the Federal Reserve has extended operation twist until the end of the year.
However, concerns about an economic slowdown, largely driven by events in Europe and China, has seen markets remain fixated on further measures to boost slowing economic data.
This fixation has seen Fed Chairman Ben Bernanke come under pressure on virtually a monthly basis as to the timing of further easing measures as markets obsess over every shred of data.
This has occurred so much that you’ve had the ridiculous spectacle of markets going up on bad economic data, because it makes the argument for extra central bank largesse that much more compelling.
On the other hand, good data has also been treated fairly positively, on the basis that the recovery continues to gain traction, in a classic no lose scenario for equity investors.
The problem with this approach is that eventually company earnings valuations will start to move out of line in the context of the economic environment they are operating in.
We are already seeing evidence of this in the latest company earnings with profits holding up in around 65% of cases, but sales revenues only beating expectations in around 40% of cases.
This suggests that monetary policy could well be reaching the limits of its effectiveness, and as such, for any future Fed intervention to be effective, it would have to be so large that it would be potentially politically contentious.
Therein lies Mr. Bernanke’s problem, given that recent US economic data continues to surprise and disappoint in equal measure.
Recent jobs data is a case in point, from payrolls growth posting +200k a month in the early part of the year, jobs growth has tailed off, to be sub 100k in June, though unemployment has continued to fall, now at 8.2%.
Manufacturing data has held up fairly well in some regions like Chicago, but disappointed in places like Dallas and Milwaukee, while the Beige Book has painted a picture of slow but sustained growth.
This mixed picture suggests that the Fed will continue to play the long game and keep them on the sidelines after this evening’s meeting, with attention turning to the latest payrolls data on Friday, with an improvement to 100k expected.
The likelihood is that, at most, they might extend their low rate guidance into 2015, while reiterating their policy of being prepared to act if economic conditions deteriorate. If markets are looking for anything more than that they could well be disappointed.
Let’s not forget the Fed have only just rolled over “operation twist” into the end of the year, so any new measures would be an admission of failure in that policy.
No action this evening seems most likely. This should then push the speculation about further QE to Jackson Hole at the end of August, and then the September meeting, with careful scrutiny of each economic data point, as speculation continues right up to November election day.
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Financial Market Comments from Michael Hewson, Market Analyst, CMC Markets.
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