24 Aug 2011

QE3 or GFC2?

US Federal Reserve Chairman Ben Bernanke.Will it be another case of a "relief, then grief" rally for stocks?
Each year, the world's central bankers gather in Jackson Hole, Wyoming, in the shadow of the Grand Teton mountains to discuss arcane monetary policy - and in recent gatherings, devise ways of saving the global economy.
This time last year, the event spawned QE2 - not an ocean liner, but the second round of quantitative easing by the US Federal Reserve. The easing was in fact pressing - as in the Fed hitting the button on the country's printing press - to the tune of at least another $US600 billion for QE2.
The result was immediate. Investors snapped up assets from property to commodities in anticipation of funds flooding world markets. Stocks joined the rally, with the Dow Jones benchmark jumping 28 per cent between August 2010 and April this year.
Buoying hopes was the expectation that QE2 would spark a recovery in the US economy, extra demand that would flow from the world's largest economy to everywhere else - particularly in regions also pouring funds in money markets.
One year on, though, most economic indicators, particularly in the US and Europe, are turning decidedly lower. Debt woes in both regions are mounting and growth is slowing.

QE3 for GFC2?
Renewed fears of another recession - if not Global Financial Crisis Mark II - sent share markets tumbling earlier this month.
In recent days, including on local and overseas markets, the mood has turned more positive, with US markets alone up 3 per cent overnight.
The spark: hopes that US Fed chairman Ben Bernanke will use the Jackson Hole bankers fest to indicate support for QE3 - the third attempt to revive the US economy since the 2008-09 recession.
European stocks were also mostly higher, and locally shares rose as much as 1.6 per cent, adding to yesterday's 2.2 per cent advance, before giving up all of the gains.
The pullback underscores some traders' doubts that a QE3 will do the trick.
"I guess grasping at straws drives (the market) higher in the expectation that this one might work,” said Kevin Massey manager of corporate broking at Foster Stockbroking. "Everyone is betting on this QE3 thing (but) we've got inflation much higher now than last time and core inflation is high. So I'm just not sure the Fed can do it.”
Critics also contend QE itself also poses a risk for creating future inflation.

More the same?
“The last two (rounds of QE) lifted stock prices and traders expect another will do the same so are positioning early,” said Dave Hofman, director at Sydney-based CCZ Statton Equities. “Markets, as we know, are driven by confidence and expectation.”
“It is clear that governments are trying all they can to avoid large scale unemployment and are displaying a previously unseen willingness to intervene in the private sector.”
But with the improvement in the US and euro zone economies needed to sustain corporate profits elusive, a longer term cause for optimism is missing, he said.
“In the short term (the rally) is irrational and it's unlikely to last,” said Mr Hofman.

Rates view
Despite the fizz of optimism by investors, sentiment remains fickle.
One gauge of that fecklessness is short-term money market allowing investors to bet on what the Reserve Bank of Australia will do at its next interest rate meeting on September 6.
Earlier today, those credit futures showed an even-money chance that the RBA would cut its cash rate next month to 4.5 per cent from 4.75 per cent. Last Friday, the bet was a 100 per cent chance of a cut.
The RBA, of course, will ignore such punting, focusing instead on trying to assess where Australia's economy is headed, particularly the inflation rate.

Slowdown signs
As officials have said in recent days, that forecasting is getting more difficult as financial markets swing. More concrete, though, are the latest signs the North Atlantic economies are slowing.
US-based economic research group IHS Global Insight believes there is one-in-four chance of a recession in the US and a 40 per cent chance of a recession in Europe, either of which could create yet another drags on global growth.
Peter Warnes, head of equity research for Morningstar Australasia, said the market wants a QE3 announcement on Friday in Jackson Hole but there is no telling what Mr Bernanke might actually say. The speech will be made Friday evening, Australia time.
“If I was a trader, I wouldn't be going into the weekend, 'long' the market,” he said, referring to traders' bets that an asset will rise in price.
“I wouldn't be relying what Bernanke is going to say in Jackson Hole.”

Less is more
Perversely, the weak housing data released last night, showing 298,000 new home sales, less then the 310,000 expected by the market, stoked hopes of further stimulus from the US Fed.
“Weaker US economic data gives investors very little to be optimistic about which is why the rally most likely reflects the market's hope that weak data will push the Fed to do more,” said New York-based Kathy Lien Director of Currency Research at GFT.

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