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Bernanke and Fed Tapering Together


Federal Reserve Chairman Ben Bernanke and his $85 billion per month bond buying spree will be tapering down and winding down together.  Wednesday’s announcement eliminated speculation about the Fed’s plans. Tapering will begin later this year and the spending spree will conclude in 2014, the same year Bernanke will relinquish the reins.

The news has sent shock waves through global equity markets and created uneasy volatility in currency markets. The move sends a loud message that markets and investors must return to fundamentals. Interest rates will rise, enterprises will be valued by their performance and the Fed will have to start planning to dispose of trillions of dollars of assets. It’s back to the basics and for many it’s about time.

The Fed’s position should not have been a surprise. In his May 22, 2013, meeting, Bernanke set the stage. Equity markets reacted but bounced back. This time, the fall has been faster and deeper.

Currency markets have also reacted strongly. On Thursday, the benchmark 10-year US Treasury note was down 24/32, yielding 2.4412 percent. The USD reached two-week highs against major currencies and is poised to extend gains on Friday. On Fridy, the 10-year Treasury yield rose to 2.531 percent.

Meanwhile, investors rushed to pull money from emerging economies. The dollar posted a 1.53 percent gain against the yen to 98.28 yen. The dollar pushed the euro to a two-week low at $1.3162. Speculation is that the euro will soon fall below the $1.30 mark.

Disappointing factory output in China had analysts wondering if the government would intercede.  China’s economy slowed to the lowest growth rate in 13 year in 2012 and is on pace to shrink further this year.

In Europe, Markit’s Flash Eurozone Composite PIN remained below the trend line for growth in the region. With China’s slowdown and the tapering of US stimulus, prospects for growth in Europe are dim. The Fed’s stimulus had a major impact upon the global marketplace. In overnight trading, political turmoil in Greece pushed 10-year bonds up 70 basis points to an unsustainable 11.4 percent.

Peru’s currency, sol, closed at 2.79 against the USD, it’s lowest close in more than 2 years. The central bank immediately tried to sell 950 billion soles in two-month notes. Currencies in Malaysia, Thailand and the Philippines experienced large volume pullback, underscoring the fragility of emerging economies.

The dollar got a further boost from improved factory output in the Midwest and from an increase in existing home sales. Against a basket of currencies, the USD reached a two-week high of 82.145, up 0.5 percent. The Australian dollar fell to a 33-month low against the USD. This decline was heavily influenced by China’s nine month low factory report.

Equity Markets. Tremble

On Wednesday and Thursday, the S&P 500 suffered its biggest losses since April. The index fell below its moving 50-day average for just the second day this year.  The S&P was 4 percent below the record high of 1,669.16 set the day before Bernanke ‘s May speech.

The Dow Jones shed 293.06 points, nearly 2 percent, settling at 14,819.13 at Thursday’s close.  Equities in Europe lost 3 percent. MTSCI’s emerging market index slumped 3.69 percent. The Asian Pacific region outside Japan fell 3.87 percent. MTSCI’s all-country world index lost 2.93 percent, while the FTSEEurofirst 300 index settled at 1,143.99, down 3.07 percent.

On Friday, major equity indexes rallied slightly. The Nasdaq fell for the third straight day. 47 percent of Nasdaq stocks rose on Friday. 10.29 billion shares exchanged hands on the New York Stock Exchange.6.36 million Nasdaq shares were traded.

When trading commenced on Friday, the S&P 500 was off 5 percent from its all-time high reached on May 21. The CBOE Volatility Index fell 8 percent after jumping 23 percent on Thursday.

For the week, the DOW was off 1.8 percent. The S&P 500 was down 2.1 percent  and Nasdaq shed 1.9 percent. Nicholas Cage, the chief market analyst At ConvergEx in New York summed up analyst sentiment; “A lot of investors thought the sell-off was overdone after we broke through those technical levels, but all the existential things that drove us down are still in place. People aren’t sure what’s going to happen with Fed policy or rates or anything else. It is too soon to say we hit a bottom.”

Bernanke and Fed Tapering Together

Federal Reserve Chairmen Ben Bernanke and his $85 billion per month bond buying spree will be tapering down and winding down together.  Wednesday’s announcement eliminated speculation about the Fed’s plans. Tapering will begin later this year and the spending spree will conclude in 2014, the same year Bernanke will relinquish the reins.

The news has sent shock waves through global equity markets and created uneasy volatility in currency markets. The move sends a loud message that markets and investors must return to fundamentals. Interest rates will rise, enterprises will be valued by their performance and the Fed will have to start planning to dispose of trillions of dollars of assets. It’s back to the basics and for many it’s about time.

The Fed’s position should not have been a surprise. In his May 22, 2013, meeting, Bernanke set the stage. Equity markets reacted but bounced back. This time, the fall has been faster and deeper.

Currency markets have also reacted strongly. On Thursday, the benchmark 10-year US Treasury note was down 24/32, yielding 2.4412 percent. The USD reached two-week highs against major currencies and is poised to extend gains on Friday. On Fridy, the 10-year Treasury yield rose to 2.531 percent.

Meanwhile, investors rushed to pull money from emerging economies. The dollar posted a 1.53 percent gain against the yen to 98.28 yen. The dollar pushed the euro to a two-week low at $1.3162. Speculation is that the euro will soon fall below the $1.30 mark.

Disappointing factory output in China had analysts wondering if the government would intercede.  China’s economy slowed to the lowest growth rate in 13 year in 2012 and is on pace to shrink further this year.

In Europe, Markit’s Flash Eurozone Composite PIN remained below the trend line for growth in the region. With China’s slowdown and the tapering of US stimulus, prospects for growth in Europe are dim. The Fed’s stimulus had a major impact upon the global marketplace. In overnight trading, political turmoil in Greece pushed 10-year bonds up 70 basis points to an unsustainable 11.4 percent.

Peru’s currency, sol, closed at 2.79 against the USD, it’s lowest close in more than 2 years. The central bank immediately tried to sell 950 billion soles in two-month notes. Currencies in Malaysia, Thailand and the Philippines experienced large volume pullback, underscoring the fragility of emerging economies.

The dollar got a further boost from improved factory output in the Midwest and from an increase in existing home sales. Against a basket of currencies, the USD reached a two-week high of 82.145, up 0.5 percent. The Australian dollar fell to a 33-month low against the USD. This decline was heavily influenced by China’s nine month low factory report.

Equity Markets. Tremble

On Wednesday and Thursday, the S&P 500 suffered its biggest losses since April. The index fell below its moving 50-day average for just the second day this year.  The S&P was 4 percent below the record high of 1,669.16 set the day before Bernanke ‘s May speech.

The Dow Jones shed 293.06 points, nearly 2 percent, settling at 14,819.13 at Thursday’s close.  Equities in Europe lost 3 percent. MTSCI’s emerging market index slumped 3.69 percent. The Asian Pacific region outside Japan fell 3.87 percent. MTSCI’s all-country world index lost 2.93 percent, while the FTSEEurofirst 300 index settled at 1,143.99, down 3.07 percent.

On Friday, major equity indexes rallied slightly. The Nasdaq fell for the third straight day. 47 percent of Nasdaq stocks rose on Friday. 10.29 billion shares exchanged hands on the New York Stock Exchange.6.36 million Nasdaq shares were traded.

When trading commenced on Friday, the S&P 500 was off 5 percent from its all-time high reached on May 21. The CBOE Volatility Index fell 8 percent after jumping 23 percent on Thursday.

For the week, the DOW was off 1.8 percent. The S&P 500 was down 2.1 percent  and Nasdaq shed 1.9 percent. Nicholas Cage, the chief market analyst At ConvergEx in New York summed up analyst sentiment; “A lot of investors thought the sell-off was overdone after we broke through those technical levels, but all the existential things that drove us down are still in place. People aren’t sure what’s going to happen with Fed policy or rates or anything else. It is too soon to say we hit a bottom.”

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Positive PMI Report May Hold UK Recession Off


Taking a page from the US consumer, British consumers bucked current economic data and produced some unexpected PMI gains for February. The services sector, which constitutes three-fourths of UK GDP, grew at its fastest pace in five months and may well have lifted the onus of the country’s third recession in four years from the economy.

The country’s Purchasing Managers Index (PMI) rose in February to 51.8, surpassing January’s mark of 51.5 in January. The median economist PM forecast from analysts was 51.0. The report comes on the heels of the worst construction PMI in three years. After the economy shrank in the fourth quarter 2012, GDP seemed poised for another fall in the first three months of 2013. Those fears may be subsiding based on these stronger than expected numbers.

The Markit PMI report neither includes data regarding the retail sector nor data regarding the public sector. However, Markit reports that optimism about future business activity is strong, reaching a nine-month high at 67.6 up from 67.2 in January.

Inflation has cut into profits in the service sector but transport, storage, communication services, financial intermediation, business services, personal services, computing services, hotels and restaurants all reflect encouraging activity.

To add support to the PMI, the British Retail Consortium reported the best sales volume in more than two years. Most surprising is a boost in home sales. These purchase shave led to an increase in the sales of furniture, home goods and electrical goods.

The Bank of England

The dim construction report led to speculation that the Bank of England would resort to another round of quantitative easing, raising inflation concerns and devaluing the pound. Prior to the PMI report, Reuters analysts estimated there was a 40 percent chance of another easing initiative. The jury is still out on this verdict.

33 Percent of Brits Support Anti-EU Policy

In news that looks discouraging for Prime Minister David Cameron, a poll by YouGov indicates that there is growing support to pull out of the EU. Cameron has promised an up-down vote in 2017. Cameron’s Conservative Party appears to be losing ground to opponents of the EU treaty.

The YouGov poll suggests that Cameron waited too long to announce the long-awaited vote.  Liberal Democrats are poised to take a leadership role in Parliament and at the top. Led by Deputy Prime Minister David Clegg, Liberal Democrats received the biggest share of supp0ort in the YouGov poll.

Bonus Controversy

Recent EU legislation may well be the last straw for Britain and the EU.  Chancellor George Osborne has apparently failed in his efforts to block restraints on earning of bakers, investment bankers and risk takers. Although Germany asked a review of the new agreement which would limit the amount of bonuses bank leaders could capture, the majority of EU members states support the new controls.

Unlike in the US, the EU opposes commissions earned through risk taking that would require public bailout if the gamble failed. Commissions revealed in the wake of the 2008 meltdown offended the senses of most Europeans.

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US Equities Surge


A confluence of encouraging economic data and a seemingly softening and seemingly positive tone from Republicans in the House of Representatives paved the way for the continued rise of US equity markets. Despite a relatively disappointing performance by Apple, equity markets fed off early morning economic data and climbed sharply, a trend that has seen the equity markets rise in 11 of the last 12 days.

US Labor Department

The Department of Labor released their weekly report indicating that claims for unemployment benefits decreased by 5,000. The seasonally adjusted rate dipped to 330,000, the lowest level of unemployment in five years. The national average remained steady at 7.8 percent. The report is bolstered by decisions of employers to hold back on proposed layoffs after the holiday season.

Purchasing Managers Industry Index

The Purchasing Managers Industry Purchasing Index for January jumped to 56.1, the highest rate in nearly one year. As a measure of growth, a rate of 50 is a good indicator of expansion. The rise a more than 2 points higher than the index in December. A preliminary projection from Markit has indicated their expectation that the index would slip to 53.0.

China, Euro Zone Stabilizing   

Despite fears about Spain and the weight of Greece, news from the euro zone continues a level of stability. At the same time, a manufacturing and export recovery in China has helped to lift the economic outlook across the globe.

The employment data and the purchasing index have been awaited with interest to see how the tax policy of the fiscal cliff settlement would impact employers and consumers. While stability in these sectors is a positive sign, the key to financial growth will require resolution to the country’s budget and debt burden. Only then will US corporations, fully supplied with capital, spur growth.

Debt Level Extension

In a move that appeared to be a modest move to the middle, House Republicans passed legislation increasing the debt limit and foregoing the anxiety of another debt ceiling crisis for another four months. 33 Republicans and 111 Democrats voted against the bill which carried 285-144.

House Democrats were skeptical about the bill for fear that the country would be faced with another cliff come May. Prior to the May debt ceiling extension debate, the next debate will revolve around the sequestration. It is expected that the Republicans will use the debt ceiling extension as leverage during the upcoming debate.

Republicans are pointing to necessary cuts and revision to social programs as a necessity of the upcoming debate. In his inaugural speech, President Obama subtly suggested a need for strengthening social programs, which indicates reform. It is expected that Obama will have to soothe Democratic jitters to revise the country Medicare, Medicaid and Social Security programs.

House Majority Leader Boehner is pressing for a 10-year budget that would be balanced. As such, a provision of the House bill requires the Senate to submit a budget for 2014. If the budget is not forthcoming, Congressional pay will be suspended until such time as a 2014 budget is passed. The US fiscal year commences October 1, 2013. The “no-pay” condition is one that American taxpayers support with vigor.

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Construction Sector Slowdown Weighs On Pound Sterling


Pound sterling gains were halted in the overnight following the release of the Markit/CIPS UK construction PMI survey.  Although still relatively positive, survey results were worse than had been anticipated by analysts, leaving some still skeptical of any short term UK economic recovery.  As a result, the British pound traded slightly lower to yesterday’s high at 1.5841 against the US dollar.  The exchange rate hit as high as 1.5869 in midday trading yesterday.

According to the construction sector survey, index readings dipped to a 51.4 in January – below the December 53.2 mark.  Although this is the 13th consecutive month of gains, the figure stands as the weakest reading in 4 months and compounds fears that the recession isn’t just over yet.  Notably, however, today’s survey findings still portend to a thin silver lining for Europe’s second largest economy.  According to subcomponent readings, confidence among construction companies and business leaders continues to be optimistic – although the same companies are unlikely to add to current payrolls.

The recent round of optimism seems to have been spurred on by improving month to month comparisons in recent weeks.  Notably, manufacturing sector activity improved to an 8-month high, while confidence among consumers recovered to the highest in almost the same time period.

Given the overwhelming and rising optimistic sentiment, today’s results may be temporary as traders begin to shift their sentiment to a potential turnaround in the UK economy.  This should support the current sterling momentum – if at least for another session or two.

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