From the opening bell to close, our commentary keeps you updated with the latest market action.
Mid Day Comment: European Stocks In Choppy Trade; IMF Warns On UK - Bernanke Eyed
Another choppy day for European share markets as investors await Fed head Bernanke’s testimony later this evening together with the release of the Fed meeting minutes. Comments by Fed speakers Bullard and Dudley yesterday suggesting that the Fed is unlikely to downsize the amount of asset purchases as the recovery remains somewhat fragile have been absorbed by markets in Europe this morning. Bullard noted that he could not see a good case for QE tapering unless a turnaround in inflation while Dudley indicated the economic outlook is still uncertain. These comments appear to be carefully placed, perhaps to temper market expectations of a surprise announcement of a QE exit plan by Bernanke later.
It’s likely the Fed chairman will stay neutral, saying the Fed is prepared to reduce or increase the pace of asset purchases but will continue to monitor the progress or lack of in economic activity. That said, tapering of QE is inevitable so Bernanke may provide details on how the Fed plans to reduce stimulus when they decide to do so. If the chairman stays neutral, it will most certainly signal to markets the continuation of QE until further notice, prompting a flight out of safe havens such as US bonds [Yields have crept higher on Fed tapering QE fears in recent session], slap the US dollar a tad but kick equities higher. US indices in that case are likely to print fresh record highs with the DJIA above 16,000 by the end of the week and the S&P500 above 1700 not out of the question.
A rally on Wall Street will in that case drive European markets higher with the FTSE 100 in London already hitting 13-year highs and not far off its record close of 6,950.60 in late 1999. Given the UK’s FTSE100 is mostly crammed with companies that earn large proportion of their revenue outside of the UK, such as Wolseley, a company highly exposed to the US housing recovery, the rally for the FTSE100 most certainly has legs.
It has been central bank day across the globe – the Bank of Japan kept monetary policies on hold, staying firm on the aggressive stimulus measure which remains a hefty weight on the yen but bolsters the Japanese stock market which again rose in overnight trade. The BOJ also sounded reasonably optimistic over Japan’s economic outlook, raising their view on the country’s economic prospects for the fifth straight month. Bank of England meeting minutes showed a 6:3 split vote for unchanged policy on rates and QE, with King, Miles and Fisher voting for an additional GBP25billion of QE despite inflation edging lower in May. Governor King is sticking to his guns for more stimulus but his say in the matter will soon become irrelevant as Mark Carney takes the helm in July.
Elsewhere, the IMF’s latest report on the UK contrasted with the optimistic picture the BOE had recently painted and the UK government’s – the IMF said the UK government should ease back on its austerity measures. The stagnation of growth since mid-2010 has concerned the IMF, who are suggesting that the aggressive austerity measures will only stand to hurt to the country’s growth prospects in the long term. The IMF also believes the UK is a long way away from a strong and sustainable recovery; this report will most certainly place pressure on the UK Treasury and PM over their economic policies. Furthermore, the UK PM is likely to face increased scrutiny within his own coalition and from European leaders as he meets the region’s ministers to discuss the UK’s membership in the EU.