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Market Comment 1st Aug 2012

All eyes will be on the US Federal Reserve tonight as they announce their latest interest rate decision with much anticipation from the markets that if they don’t start another round of stimulus now they will give a clear signal that something is planned in the near future, most likely September when they meet again. 

The rationale behind pumping more money into the system in order to keep the economy growing is simple enough, the US economy is slowing and it’s slowing at a worryingly quick pace. To see your GDP fall from over 4% half a year ago, having in the following quarter and then dropping off further to a mere 1.5% in the last quarter is enough to concern any central banker who’s responsible for employment and growth. What is getting the alarm bells ringing even more is that usually when the US growth rate drops to below the 2% mark it has historically been the case that it has reached the point of no return and a recession is soon to follow. It’s the vicious circle that is a recession whereby growth slows, business confidence fades, investment plans are scaled back, hiring is curtailed and consumers cut back their spending.

The only thing that the US economy has got going for it at the moment is that a recession was averted last year when growth slowed to 1.2% and there’s every chance it could be avoided again. The labour market has been improving just enough and confidence, as evidenced by yesterday’s consumer data, is providing the support for the economy. But there’s no question that it is in a very precarious position and if there was any shock, yes you guessed it – Europe – the US would be back in recession rapidly. It’s the eurozone that remains a huge threat to the US economy and global growth as a whole so rather like a game of chess it Europe who need to make the first move and once this has been made, then the Fed can assess their actions before taking their own. Tonight is likely to prove disappointing for all those who are expecting QE3 which is why we’ve seen the Dow’s rally of the past few weeks fizzle out in the last couple of sessions. Last night the Dow lost 60 points to close just above the 13,000 level, which at least for some is technical triumph for the index.

So this morning European indices are flat to positive and it’s likely that we might see investors sit on their hands until later this evening however ahead of the Fed’s announcement there’s a raft of economic data due out. To start with there’s UK and EU manufacturing PMI data with the US to follow later as well as their monthly ADP private payroll number which is expected to show over 100k new jobs added in July.

That seemed to be the sentiment yesterday which pushed the euro 45 pips higher versus the greenback to 1.2298. Nevertheless, it remains to be seen how long the euro’s bounce will last if (at least on the European front) it turns out to be just another meeting with a lot to argue for but not many agreements at the end.

The recent rally in gold supported by speculation the central bankers in the US and Europe will restart the printing press one way or the other, lost steam yesterday. As we approached “D Day”, it became less obvious they will act so the demand for the precious metal as an alternative asset was hurt. Overall gold lost 8 bucks to 1614 for the day and this morning stands at 1618.

Despite a surprise rise in the US consumer confidence, energy investors took the safe route and squared their long positions. It might have been they expected a delay in the Fed adopting new stimulus measures to boost the economy especially when the non farm payrolls numbers will be released on Friday or that today could reveal another bearish report regarding crude oil’s weekly inventories. All in all the WTI crude prices retraced $1.61 to $88.06 a barrel.
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Market Comment 1st Aug 2012

All eyes will be on the US Federal Reserve tonight as they announce their latest interest rate decision with much anticipation from the markets that if they don’t start another round of stimulus now they will give a clear signal that something is planned in the near future, most likely September when they meet again. 

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