The Germans will be getting out the beer and drinking a double dose of the amber nectar not only because MuttiMerkel as she is known (otherwise known as ‘Mother’ Angela Merkel) was reelected on Sunday 22nd September, but also because new reports issued today show that the Eurozone is doing better than expected.
Following the FOMC surprise, no less than twelve Fed speeches will provide some "clarifications" on where the Fed now stands. It is very likely that this subject will continue to dominate the discussions of market participants. At the same time, US data will get scrutinized after the recent weakening and to see how warranted the Fed's concerns were. Two US consumer sentiment surveys, durable goods orders, and the third reading of Q2 GDP are important. In addition, monthly consumption and income data for August provide more information on the third quarter and of course there will be interest in the latest weekly claims numbers after some distortions in recent readings.
The German elections came and went, with Merkel initially said to have an absolute majority, but in the end being forced to design a Grand Coalition. Still, the punditry has been tripping over each other desperate to make that result (or any other result) positive for Europe , which despite now paving the way for policy continuity, together with the latest round of less than impressive Eurozone PMIs (following the strongest China HSBC PMI in 6 months) failed to inspire appetite for risk in Europe this morning where stocks have traded mixed. What is amusing is that everyone expected, the second Merkel gets reelected things in Europe would start going pump in the night - sure enough, the Italian FTSE-MIB is underperforming in early trade amid reports that Italy's economy minister Saccomanni threatened to step down if the country does not stick to its pledges it made to the European Commission. However to a certain degree, the negative sentiment towards Italy was offset by €4.8bln of coupon payments and €24.1bln of redemptions from Italy which is eligible for reinvestment this week. With a second Greek 2-day strike in one week scheduled for Tuesday and Wednesday, look for Europe's catalytic event to unclog, now that the German political picture is set, culminating with the 3rd (and 4th) Greek bailouts and probably more: after all Europe now needs a lower EURUSD (recall Adidas' warning), and that usually means a localized crisis.
Merkel Wins Federal Election But Coalition Partner Below Bundestag Threshold: Final Outcome Too Close To CallSubmitted by Tyler Durden on 09/22/2013 11:17 -0500
While the outcome of the election from the perspective of "the grand coalition" is still too close to call, Exit polls make it clear that Merkels CDU/CSU party has won the election with 42.5% of the vote. However, there are some very interesting results that could be a problem for Europe's 'program-based' nations: GERMAN AFD TAKES 4.8% IN FEDERAL ELECTION, ZDF EXIT POLL SHOWS; GERMAN FDP TAKES 4.5% IN FEDERAL ELECTION, ZDF EXIT POLL SHOWS. So the anti-Euro party has more votes (nearly the 5% required to enter the Bundestag) than Merkel's current coalition partner FDP party which creates major uncertainty over the forming of a coalition (which took 3 weeks in 2005) - which as we noted seemed to priced into Greek stocks on Friday. The pirate party is projected to have 2.5% of the vote. If the anti-Euro AfD enters the parliaments, a "Grand Coalition" appears inevitable. However, if it does not cross the 5% threshold, Merkel may end up with an absolute majority in the Bundestag and will not nead a coalition partner.
As we wrap up a most interesting, and volatile, week there are some things that we have discussed previously that are now brewing, interesting points to consider and risks to be aware of. In this regard we thought we would share a few things that caught our attention:
1) Angela Merkel Election No So Assured
2) The Debt Ceiling Debate
3) The "Taper" Indecision Is Back
4) In The "Economy Is Improving" Camp
5) Syria Already Set To Miss A Deadline
6) Everything Else...
Simply put, complacency is not an option; Stocks are overvalued, rates are rising, earnings are deteriorating and despite signs of short term economic improvements the data trends remain within negative downtrends. Investors, however, have disregarded fundamentals as irrelevant as long as the Federal Reserve remains committed to its accommodative policies. The problem is that no one really knows has this will turn out and the current assumptions are based upon past performance.
When it comes to discombobulated people, IceCap's Keith Dicker notes the financial World has a bunch of them. Leading the pack during the roaring 1990s was the King of Confusion himself – Alan Greenspan. His money reign at the US Federal Reserve was highlighted by bailing out Wall Street’s biggest hedge fund, which planted the seed for the dot-com bubble. Unfortunately for the market, only the combination of retirement and hindsight allowed Mr. Greenspan to become less confused when he admitted he had found a “flaw” in his economic philosophy. Next up on the baffle scale has to be the Eurozone. The decision in 1995 to create a common currency was actually brilliant. The final watered down product - not so much. For now, as markets roll into the fall, investors, politicians, and central bankers remain just as discombobulated as ever... And if you think you are confused... Try being Ben Bernanke for a day.
It has been a "Summer of Recovery" for the U.S. economy with GDP growth rising from 1.1% in the first quarter to 2.5% in the second and manufacturing surveys showed sharp jumps in new orders and outlooks. The same occurred in the Eurozone with Markit's PMI reports showing sharp bounces higher and hopes that the recession that has plagued the region was finally coming to an end. The question of sustainability remains. The recent uptick in the Eurozone has now ended which most likely suggests that the recent pop in domestic production is likely ephemeral. The next couple of months of data should be telling in the regard and also suggests why employment reports have been much weaker than anticipated. With hopes once again running high that the economy is set to regain "escape velocity" in the coming year there is plenty of margin for disappointment.
Yes, yes, only the Fed matters. Still, there was some event flow overnight which while completely meaningless for the epic liquidity bubble, may have some implications eventually when the music finally stops. In thie regard, perhaps the best summary of the the lunacy coming out of the Marriner Eccles building is the following sentence from Bloomberg: "Bernanke said he was concerned that market interest rates, driven higher by his own suggestion he would scale back QE, would curb growth." One can't make this up.
The day when the Fed will begin the unwind of its latest QE program (for the fourth time) has finally arrived (as has the day when an impeachment committee will vote whether to ban Berlusconi from public office, but understandably that is getting far less press). In a few short hours the answer to all those questions of whether and how much of the taper was priced in, will be revealed. But while the Taper discussions will dominate the airwaves, as they have for the past five months, there actually were some news in the world that had nothing to do with the US Politburo in charge of capital markets and the US economy, located in the Marriner Eccles building. Here is a brief summary.
The Euro area is no longer the centre of all the stress... EM countries are! Despite their significant correction in recent months, SocGen notes that valuations remain far more extreme (or cheap) and outflows are dominating (despite a 24% discount on a price-to-book basis across EM stocks, they reain rich historically). Significant structural issues like balance of payments, deficit or inflation may lead to further turmoil in emerging markets, potentially destabilising the underlying economies. Simply put, SocGen warns, valuations have further to fall; do not catch the falling knife (yet).
With Syria now quickly fading from the headlines and Wall Street believing that Yellen is a "shoe in" for the Fed, what headwinds still remain for the markets ahead...
European recovery propaganda may be humming (for the latest proof see today's German ZEW sentiment index which soared from 42.0 to 49.0 matching the all time high in the Dax), but when it comes to the actual economy - that place where commerce is conducted and where supply and demand curves intersect, the situation has never been worse. And not only unemployment which is at a persistently record high for the Eurozone, but actual transactions, in this case in the form of car sales. As AP reports, for the first eight months of the year, passenger car sales in the European Union were off 5.2% to 7.84 million compared with the same period last year, the European Auto Manufacturers' Association said Tuesday. That's the lowest January-August figure since the group started keeping track in 1990.
Overnight trading started with Asian markets continuing where yesterday's S&P 500 fizzle ended, wishing Summers could withdraw from Fed running again, as both the Nikkei and SHCOMP were well lower by the close. Perhaps all the easy multiple-expanding, headline-driven money is made, or perhaps economic fundamentals will finally start having to justify a 17x multiple on the S&P (a good is good regime for those who may be too young, or old, to remember), but overnight US futures were dull, and no doubt anticipating today's start of the "Most important FOMC meeting ever", which concludes tomorrow with an announcement by the Fed of what and how much (if any) tapering it will commence with an eye toward halting QE next summer, although more realistically what will happen is an Untaper being announced before then. While the start of the FOMC meeting is the main event, today we get CPI, TIC flows and the NAHB housing market index. Today's POMO is another modest $1.25-$1.75 billion in the long-end sector.
Greek PM Antonis Samaras: "You have to tell people the truth but you have to give them hope as well." i.e., lie
While the only market moving event of note had nothing to do with the economy (as usual), and everything to do with the Fed's potential propensity to print even more dollars and inject even more reserves into the stock market (now that Summers the wrongly perceived "hawk" is out) some other notable events did take place in the Monday trading session. Of note: while India's August inflation soared far higher than the expected 5.7%, rising to 6.1% from 5.79% (making life for the RBI even more miserable, as it is fighting inflation on one hand, and a lack of liquidity on the other), in Europe inflation decelerated to 1.3% from 1.6% in July driven by a drop in energy prices, while core inflation was a tiny 1.1%. In a continent with record negative loan growth this is to be expected. Additionally, as also reported, Merkel appears to be positioned stronger ahead of this weekend's Federal election following stronger results for her CDU/CSU, if weaker for her broader coalition. In Libya, oil protesters said they would continue stoppages at oil terminals until their demands are met in yet another startling outcome for US foreign intervention. Finally, some headline on Syria noted a Kerry statement "will not tolerate avoidance of a Syria deal", while Lavrov observed that it may be time to "force Syria opposition to peace talks." And one quote of the day so far: "Don't want market to become excessively exuberant" from the ECB's Mersch- just modestly so?