Financial markets in Europe have picked up the pace later afternoon, supported by a surge on Wall Street as investors cheer another bumper report on the US housing market and hopes that the Federal Reserve will assuage investors fear of imminent unwinding of asset purchases and instead provide some clarity on when they intend to ease stimulus measures. US housing starts rose 6.8% in the month, above market expectations and confirming the US housing market is in a full blown recovery mode. Monday’s NAHB housing market report sounded off a similar tone, encouraging investors over the US economic recovery. The Federal Reserve have kicked off their 2-day policy meeting and these strong data points are undoubtedly on top of the central bank’s agenda amongst inflation, unemployment and economic growth. Traders are hoping that the Fed will dampen market fears over imminent scaling back of asset purchases and will manage market expectations by providing some details on possible dates when the Fed will taper. Traders are also looking for a commitment that rates will remain at ultra-low levels while the Fed tapers. When it comes to eventual tapering of QE, it’s unlikely the Fed will taper a large amount of stimulus in forthcoming months but instead a small amount first, perhaps around $5billion to $10billion. The fact is that the US economy, though in recovery mode, remains fragile and a premature withdrawal of QE may cause the recovery to derail. The Fed is aware of this and know full well that premature withdrawal would pose a systemic risk to the US economic recovery. Today’s inflation data from the US rebounded to 1.4% in May from 1.1% previously but it’s still below the Fed’s 2% target area which allows the central bank ample room to unwind QE. That said, the US labour market must show signs of sustained improvement with nonfarm payrolls printed above 200k over the next four months and the unemployment rate to edge below 7% before really letting go of QE. At present, it’s uncertain that the US economy is on a path of self-sustaining recovery and for that reason, immediate tapering of all asset purchases is unlikely to take place. Other than Wednesday’s Fed meeting and press conference, we have BOE meeting minutes and UK Chancellor Osborne’s annual Mansion House speech which should shed some light on the privatization of UK banks Lloyds Banking Group and Royal Bank of Scotland. ________________________________________ Ishaq Siddiqi Market Strategist
Posted on: Tue, 18 Jun 2013 15:09:47 +0000
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