European Stocks Rebound as Yellen Clarifies Fed Rate Policy.
The negative market reaction in developed markets to the decision of the US Federal Reserve in maintaining the status quo and keeping policy rates near the zero bound is quite telling and counter-intuitive. European stocks jumped from an eight-month low after Federal Reserve Chair Janet Yellen said she’s ready to raise rates this year, indicating recent market turmoil won’t derail the U.S. recovery.
Equities sank last week, as markets continue to be roiled by the Federal Reserve’s Sept. 17 decision to hold interest rates at zero, and the ensuing uncertainty about the timing of a rate rise.Strong or weak, September’s jobs report could sway the debate in the week ahead about when the Federal Reserve will hike rates, while markets also watch Washington to see if the budget battle is going to get any worse.
While Janet Yellen’s policy decision was on expected lines, her tone when referring to the threats posed by global factors, especially China, were quite a mood dampener. And she implicitly rejects the idea that the economy can stand or thrive without her help.” The FMI economist himself would atone, as forecaster, for the “sin of gullibility.” Lewis was one of many who predicted that Yellen’s Federal Open Market Committee would raise the interest rate on federal funds at its mid-September meeting. There was no particular catalyst beyond the deterioration in sentiment and a desire by some investors to take down exposure to riskier assets, like small-caps and biotechs, traders say.
The last time international factors stopped the US Fed from hiking rates was in 1997-1998 when the Asian financial crisis, Russia’s default and the fall of LTCM posed serious global systemic risks. Those and other remarks helped clarify her comments from the week earlier when the Fed held off on a rate hike, and spooked the markets by highlighting its concerns about a slowing China. The market is suffering from the aftershocks of the Fed’s decision, says David Lefkowitz, senior equity strategist at UBS Wealth Management Americas: “It’s still trying to digest what the Fed is trying to communicate.” In her remarks, the Fed chair suggested overseas developments wouldn’t be important enough to have an impact on the decision to hike later this year, seemingly backpedaling from the Fed’s previous statement. The DAX has been especially punished so we started buying German stocks yesterday.” Europe’s benchmark gauge dropped 18 percent from a peak in April through yesterday, taking its valuation to 14.6 times estimated earnings, down from a multiple of 17.1 in July. Futures markets were still pricing in low odds for an October Fed rate hike, at less than 20 percent, while the odds for December were just below 50 percent, as of Friday, according to RBS. “For years, we obsessed about how the Fed was going to hike rates and that’s going to be bad.
CDs are still yielding negative returns against the rate of inflation, with struggling seniors often lured into taking on unaccustomed risk in hopes of earning decent returns on their money. Investors need greater clarity to make fundamental investment decisions. “The only people making money now are day traders,” he adds. “The U.S. is not a zero fed-funds-rate economy now,” says David Seaburg, head of sales trading at Cowen. Quantitative Easing (QE) measures were initially a response to prevent the financial system from falling off the cliff during the peak of the credit crisis but soon turned into instruments to stimulate the real economy.
The debate is still on within academics as to how effective these measures were and many blame QE for a further rise in inequality in advanced economies. Volkswagen fell 3.8 percent, reversing an intraday advance of as much as 4.3 percent, after people familiar with the matter said executives in Germany controlled key aspects of the faked tests. Given the long lags in monetary policy, the U.S. might in two years have the lowest unemployment rate since the 1960s, while monetary policy remains stimulative.
But to the extent that the unemployment rate has halved since its peak in the US, housing prices have stabilized largely due to the wealth effect created by booming stock prices fuelled by cheap liquidity and there has not been runaway inflation as many warned back in 2008—QE in the US should be labeled as successful. I notice, wincingly, that in January, I referred to the likelihood that “Janet Yellen’s Fed will be hiking the short-term interest rate by midyear.” On other forecasts that haven’t happened: Perhaps tasting blood after having called the bear market in crude oil early last year, I have been forecasting since early in 2015 that oil would touch a low of $20 a barrel before rebounding.
After the close Thursday, the giant sportswear maker posted a 23% jump in quarterly profit and a 5% rise in revenue, with sales gains of 30% in China. Synergy Health Plc soared 42 percent after a U.S. judge denied a move by U.S. officials to block the company’s takeover by Steris Corp., paving the way for a $1.9 billion merger. Zodiac Aerospace slid 6.8 percent after American Airlines Inc. dropped the company as a supplier of seats on some of its planes, citing delivery delays.
ISM manufacturing data and vehicle sales are Thursday. “The China spillover story is big next week,” said Canally. “For ISM, vehicle sales, even the jobs report, were people spooked by what happened in August: the first 10 percent (stock market) selloff in four years. Did that slow hiring?” Traders will also stay hyperfocused on any economic or market news out of China, as well as the action in emerging markets, where currencies continued to weaken against the dollar in the past week. I also lost nerve by scaling down my expectations for the second quarter, which I initially put at 2% to 3%, but which ran at an annualized 3.9%, based on the second revision released on Friday. The European Central Bank and the Bank of Japan are also in QE mode and there are expectations of more easing from both these institutions in the coming months.