The general economic news continues to be rather grim even as the corporate news generally remains buoyant and we must be marginally concerned that the FOMC this evening decides that QE round 2 is required to get the US economy on the go again. I must admit to being a total sceptic about Quantative Easing as it always seems to me to be a very short term political solution to a problem. The equivalent of feeding fuel to a fiscal conflagration that not only misread the current situation but also built up a huge burden for the future. It has often been stated that the generation before the baby boomers has effectively handed down a financial time bomb to its children but it now appears that the subsequent generation is busy building a nuclear holocaust for theirs.
So many things now need to go right, on an overall economic level, for the western economies to afford their future liabilities that the weight of probabilities must move towards a major reassessment of the credit worthiness of some sovereign states.
In the markets the highs of just over 5400 remain pretty much intact after the FTSE did its best to break higher several times through yesterday’s session. As mentioned our clients sold into anything over the 5400 mark (yet again) and have been rewarded this morning with a pre market dip into the mid 5380’s. The momentum is definitely with the bulls but if we do not break higher soon pessimism may start to rear its head. The last couple of sell offs in May and June did not actually take much in the way of bad news to get going (in fact the overall news was rather better than it is now!). In both cases it was rather more the impression that markets were struggling to push higher and were therefore ripe for a correction. We have now been battering at 5405/15 for over two weeks with no joy it may not take much to reverse sentiment no matter what the corporate news is.
As with the FTSE the Dow is making a meal of 10700 and the S&P of 1130. We are still within touching distance of these levels so a sell off does not appear likely at the moment but traders should beware a sense of weariness emerging as the summer draws to a close. The major factor holding us up is the undeniable fact that equities are massive value versus virtually any other asset. Yields on the FTSE 100 are still over 4pc which is historically very good even if cash rates were at 4 or 5pc. But with cash at 0.5pc and 10 year gilts in the low 3pc level it is undeniable that there are good reasons for an equity market rally. Unfortunately, of course, ‘good reasons’ are often not enough.
Currency markets showed the dollar returning to some strength after Ex Treasury Secretaries Robert Rubin and Paul O’Neill advised against more fiscal stimulus and called for some long term programme to get the budget under control. One has to assume that this is the first in a long term programme to soften up the US electorate to the hard choices ahead. The fiscal decisions made by the Europeans and the UK administrations were the trigger to the rebound in the Euro and Pound and we might be at the start of a longer term rebound in the greenback (especially if the FOMC does decide not to start QE again).
If this is the case we may well be in at the start of a very long term asset revaluation (downwards) [notwithstanding my previous comment on the returns in the equity market].