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Mike van Dulken, Head of Research at Accendo Markets, commented in his Weekly Roundup to clients,
This was the week that the US central bank (Fed) went for it and signalled sufficient confidence in the US economy’s recovery momentum to announce the beginning of the end of its extraordinary monetary stimulus programme (QE3). From January, its $85bn rate of monthly bond market intervention (Treasury’s + MBS) designed to hold down bond yields and market borrowing costs to encourage spending/investment will be ‘tapered’ by $10bn (split 50/50) and likely wound down further through 2014. The message is clear – “time to start turning the taps off”.
The major policy change came a little earlier than our expectations and consensus (early next year) thanks to a combination of improved US data (jobs, growth, spending, investment, housing) and reduced political headwinds (bipartisan budget agreed but beware debt ceiling), and markets have welcomed the news two-fold. Firstly, it ends months of uncertainty (taper on? taper off? Is good data good news or bad?) and markets don’t like uncertainty. Not a bit.
Secondly, after months of Fed prepping, markets have accepted the inevitable move as proof of economic progress and that stimulus tapering is not the same as true policy tightening (raising interest rates) which is key given the addiction to easy monetary policy that has emerged from the financial-crisis. This change of attitude has been appeased by the Fed balancing its taper with a boost to its dovish forward guidance: interest rates set to stay at rock bottom well after QE ends and unemployment falls below 6.5% (currently 7.3%), coupled with emphasis that it is still concerned about low inflation and fiscal restraint and that tapering remains data dependent (watching a wide range, willingness to pause).
My only quibble now, returning to the topic of uncertainty, is that having reverted to the traditional ‘good data is good news’ relationship, any pause in the taper will surely be taken as confirming a worsening in economic conditions and thus potentially taken badly by markets. It’s a logical reaction, but the last few years have been far from normal. Unless markets are fickle enough to turn about and welcome any pause as meaning additional cheap money and so good for risk appetite. It’s a tricky one, but maybe markets are in the best place possible, right where the Fed wants them. In fact, the 3rd estimate for US Q3 GDP is just out and been revised from an already upwardly revised annualised 3.6% to 4.1% and markets are positive into the week-end. A corner may well have been turned.
We did proffer a couple of weeks ago whether the poor start to December for the FTSE100 would give a delayed Santa rally a better starting point and this has proved correct with an impressive 3.4% rally this week from 2-month lows, the index’s best weekly performance since early October; half the gains before the Fed announcement (expectations of a taper delay) and half after (taper taken as good news). Unfortunately, despite much flirting with 6600 today and support around 6580 there has been no decisive break of major resistance and so we are obliged to remain sceptical that the 7-week correction is over. Sorry, remember the proof is in the breakout. And there hasn’t been one yet. Don’t forget also that with tapering now out in the open, markets will likely need to find something else to focus on such as China or the Eurozone, which could result in both rises and falls in sentiment.
For those of you trading in and around the holidays, have fun but beware of thin volume induced volatility. It can be both a blessing and curse. As always, enjoy your weekend. Best wishes and good health to you and your family and may 2014 provide us all with interesting markets and continued economic recovery.
