Economic Insights Did the rally just start or did it end? Various markets climbed higher in the Asian session yesterday, but paused afterward. The question is obvious here: the Federal Reserve (Fed) does not want to taper toward the end of the year or the “storm” arrives very soon. Remember, we have two more Federal Open Market Committee (FOMC) meetings this year. I do not rule out short-term volatilities surging since the Fed’s decision brought anger, disappointment and exciting emotion this week. But things will synchronize again once the next jobs data is released. For now, emerging market (EM) currencies and the rest of the high-yield assets may enjoy a peaceful honeymoon in the next one to two weeks. The U.S. Treasuries Yield Curve steepened less in the past seven days. Thus, I’m not surprised to see a sharp rally in equities and Dollar counterparts since the yield curve climbed higher since early May, which implies a delay in tapering. Of course, timing still largely depends on upcoming data, especially added payrolls. I noticed the Fed pays less attention to the unemployment rate since its participation rate fell to a 35-year low, which shows it is less reliable. I remain with the view that the trigger point for the Fed to taper is the Non-Farm Payroll (NFP) moving near 200K level, but recent data is a bit far from this targeted level. All in all, it will be a cautious move even with improving data moving forward. I estimate the earliest tapering will be in December. Source: Bloomberg Click the image to enlarge Source: Bloomberg Click the image to enlarge Investment Insights After debates on the timing of tapering, we probably will face another hard question: did the Dollar slump just start or end? There could not be an answer at this point in time since we still need upcoming data to confirm, as well as the answer from the Fed. Besides that, monetary policy direction from the next Fed Chairman plays a key role here as well. Meanwhile, I prefer equities before further clarification arrives. I like Japanese and European stocks due to signs of recovery and attractive valuation. Investors probably focus on “value” at this moment, or even after tapering happens, because corporate Fundamentals decide the course once monetary policy start tightening. The Japanese P/E (price to earning) ratio was in a steady uptrend since the middle of 2012 and below the historical average, implying that solid earnings are still ongoing. I also like European stocks at this moment, given the currency bloc’s moderate recovery from the previous debt crisis. The DAX Index only trades at 14.9X at this moment, lower than the S&P 500 at 16.52 and CAC 40 at 17.96. China stabilized in 3Q, suggesting that demand on German exports will rise again. The recovery of Germany is set to lead the entire Euro Zone to further emerge from its recession.
Posted on: Sat, 21 Sep 2013 03:29:48 +0000
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