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Market Essentials - This Is The Week Right!

Last updated 9/2/2012 7:54 PM EST (GMT -5) 0 Comments - Add your comment

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Andrew Taylor

Market Strategist, GFT

Follow @ATaylor_GFT

Jackson Hole has come and gone and markets evaluated that the Federal Reserve was closer to QE3 than they had thought 24 hours previously. This dangling of the carrot by the Fed managed to once again push the QE3 Hope Trade along to another meeting, as USD sold off and equities and commodities benefited. However, fresh troubling realities from Spain and China reminded traders that dealing on facts instead of expectations is an option too.

US Watch

In a quick summary for what really needs to be taken from Jackson Hole is that the Fed is using the power of verbal intervention to keep that underlying threat that the largest economies Central Bank will be ready to take action when necessary, whose isn’t! The specifics on watching the Labor market closely, again is nothing new, but its mention by the Fed has definitely shifted the emphasis from ‘a non event at Jackson Hole’ onto this week’s Non Farm Payrolls report ahead of next week’s FOMC meeting. The US is currently all about the data releases which recently has been showing some improvement. The US markets are closed for Labor Day today with the next main data focus being the ISM Manufacturing figures due Tuesday US time.

EU Watch

One has to wonder whether ECB President Draghi is sleeping well leading into this Thursdays highly anticipated ECB Policy Meeting that he himself has set markets on the path of high expectations. If he is sleeping well then he must have a plan ready to go, if he isn’t sleeping, then I can only imagine he would be lying awake at night wondering what he is going to come up with this time. He can always take a leaf from Chairman Bernanke’s book and use the same ‘dangling a carrot on the fishing line’ trick, although the deteriorating situation of Europe to that of the US means that Mario Draghi doesn’t have the luxury of time on his side.

Concerning news emerged Friday that saw Spanish yields pop up to towards the dreaded 7% mark as Spain’s Bankia requested an immediate capital injection to remain solvent. Add to this S&P downgrade of Catalonia’s credit to Junk status really has the fire that once represents Spain’s sovereign survival is reduced to a flickering candle.

The ECBs Meeting this week is expected to reveal some policy changes as well as an outline of a plan (dangling carrot) around managing peripheral bond markets. The fact that Draghi may mention his bond plan is by no means a given as Germany still remains its major hurdle of resistance. Germans Constitutional court needs to approve the legalities of the mechanism (ESM) and although the ECB could possibly go ahead without consent from Germany, it would be a highly controversial move considering the recent rumblings from the influential Bundesbank, that has its chief threatening to quit if the bond plan was to go ahead. Sounds like still some work to be done.

AU/Asia Watch

Over the weekend China was the first to report on Manufacturing PMI numbers that showed that it had hit contraction territory  for only the second time since Nov 2011 (twice in 42 releases). It came in at 49.2, with anything under 50 being in contractionary phase and over 50 expansion. This continues to show an economy in slow down with todays HSBC PMI number being looked at closely as supporting a slowing that is potentially harder than expected.

Markets are well aware that China has the capabilities to reignite its economy but what is opening the risks for not only China but those heavily reliant on its growth is the slow policy response from officials to do something about it. This should keep traders on the defensive until action from the PBoC is seen.

Australia has a full calendar this week with the RBAs monetary policy meeting tomorrow which is widely expected to stay on hold. However, Chinas slowing has been documented as a risk and falling commodity prices are taking its toll, one can never be too sure on outcomes. Today’s Retail Sales data may be the stabiliser if it can back up its recent fortunes without the affects that a cash splash from the government back in May and June had. Expectations are for a modest number of 0.2% versus the previous 1% increase for June.

Outlook

The Asian session feels like it has the weight of the world on its shoulders at present with the uncertainty surrounding Chinas slowdown the main regional affects. At present Stimulus hopes of the ECB and Fed feel; like a million miles away and really it is the actions of the PBoC that could possibly change the current move lower

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About The Author

Andrew Taylor's financial markets career started in 1991 in the interbank FX market,where he worked for one of the largest banks in Australia. Andrew then went on to trade on behalf of some of the biggest global banks, working across five of the world's major financial hubs: Sydney, New York, Singapore, Auckland, and Tokyo.

His more than 20 years of experience spans market borders and asset classes, covering global equities, commodities, options and futures. Andrew's wealth of trading experience and ability to communicate with traders of all levels has put him in demand as a first point of contact for clients and the media alike when seeking information and guidance.